During the underwriting and approval process for a gas station loan, the underwriter will review and analyze both the borrower’s financial data and the operational information.
The primary analysis will involve cash flow. The first thing the analyst will look at is a cash flow calculation. Many banks will use different formulas but they all basically are looking to evaluate the same thing which is how much cash does the business generate. More specifically, how much cash is generated by the station as a ratio of the loan payment for the anticipated loan. The main question is whether the station generates enough money to pay back the loan with enough left to satisfy the borrower’s needs. The financial instituition will most likely use a conservative approach to create cushion in the event of a downturn.
As you’ve probably surmised, underwriting is as much an art as a science. While rules exist regarding minimums for these financial ratios, the underwriters’ judgment plays a role in determining the specific calculations.
For example, a classic judgment call involves “add-backs”. These are expense items shown in a borrower’s financial statements that may not be recurring items. Therefore, the analyst has to determine whether to adjust the calculation of cash flow by adding back the particular expense. A significant loss by theft, documented by a police report, might fall into this category. There may also be one time gains that will be deducted or situations that are not typical and these will be considered also.
Another judgment call might involve adjusting sales and revenue for loss due to road construction. For example, a 3-month construction of a turning lane in front of a station might cut sales 50 percent during that period. The analyst will determine the extent to which the financial statements will be adjusted to compensate for the event. It will help if a stabilization period of three to six months has elapsed before applying for the loan, allowing new sales and financial data to support the past-period adjustment.
So the lesson to be learned here is: the quality of your financial reporting is critical. From the lender’s perspective, better financial data increase the underwriter’s ability to make the judgments necessary to qualify the borrower and the site for the loan.
Read our related post, What are the steps to approval of your gas station loan?
Author: Scott Poulsen
February 18th, 2009 at 10:10 pm
Hello.
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thank you.
February 18th, 2009 at 10:31 pm
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February 18th, 2009 at 10:40 pm
[...] Petrobanc wrote an interesting post today onHere’s a quick excerpt During the underwriting and approval process for a gas station loan, the underwriter will review and analyze both the borrower’s financial data and the operational information. The primary analysis will involve cash flow. The first thing the analyst will look at is a cash flow calculation. Many banks will use different formulas but they all basically are looking to evaluate the same thing which is how much cash does the business generate. More specifically, how much cash is generated by t [...]
February 25th, 2009 at 2:45 pm
[...] information, see our recent entries on Looking for financing? Wondering what lenders look for? , How lenders evaluate your gas station business, and What are the steps to approval for your gas station [...]