Loan Structuring & Underwriting Flashcards

A distributor needs financing for seasonal inventory build-up that converts to cash within 6 months. Which structure best matches the need?

Answer: Seasonal revolving line of credit

Seasonal working capital needs should be financed with a revolving line repaid from conversion of inventory and receivables to cash.

What is the primary purpose of an annual clean-up (rest) period on a working capital line of credit?

Answer: To confirm the line is not funding permanent working capital or long-term assets

Requiring a zero balance for a period (e.g., 30 consecutive days) shows the line is truly self-liquidating and not funding permanent needs.

A borrowing base allows 80% of eligible receivables. Which receivables are typically excluded as ineligible?

Answer: Accounts more than 90 days past invoice date

Aged receivables (commonly over 90 days) are excluded because their collectability is doubtful.

A borrower has EBITDA of $2.0 million, unfinanced capex of $400,000, cash taxes of $200,000, and total debt service of $1.0 million. What is the fixed charge coverage ratio (EBITDA − capex − taxes) / debt service?

Answer: 1.40x

($2.0M − $0.4M − $0.2M) / $1.0M = 1.40x.

Which repayment source is generally considered the primary source for a commercial term loan financing equipment?

Answer: Cash flow from operations

Operating cash flow is the primary repayment source; collateral and guarantees are secondary and tertiary sources.

Why would a lender include an excess cash flow sweep in a term loan agreement?

Answer: To accelerate debt reduction when the borrower outperforms

A sweep requires a percentage of excess cash flow to prepay principal, reducing exposure faster.

A loan has a 5-year term with payments calculated on a 15-year amortization schedule. What risk does this structure create?

Answer: Balloon/refinance risk at maturity

A large unpaid balance remains at year 5, so repayment depends on refinancing or a balloon payment.