The goal of financial spreading is simple. You lend a company money and, over time, they pay the loan back with interest. In the end, you make a profit. Although the goal is simple, the execution is anything but…
In order for a commercial lender to issue a business loan that has a high probability of generating revenue, they need to look at a company’s financial records to assess its creditworthiness. These records typically include several years of bank statements and tax returns, which are usually delivered either on paper or in a scanned PDF.
The lender then takes this information and transfers it to a spreadsheet (hence the term “spreading”). By spreading financial information, lenders arrange data in a standardized format that makes it easy for them to review and calculate a debt-service-coverage ratio (DSCR).
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What is/How to Calculate a DSCR
DSCR = Total Debt Service/ Net Operating Income
A DSCR is a measurement of a business’s available cash flow to pay debt obligations. A DSCR less than 1 indicates that a company has negative cash flow – meaning they are unable to cover current debts without borrowing more money. A DSCR that is close to 1, say 1.1, means the company is vulnerable, and any decline in cash flow could compromise its ability to pay back loans. Lenders look for DSCRs in the 1.2-1.5 range.
Some lenders may require borrowers to maintain a minimum DSCR while the loan is outstanding, and some agreements consider a borrower in default if they fall below the threshold. The minimum DSCR is variable and depends on certain economic trends. For example, if the economy is strong, lenders might lower the minimum.
In any case, lenders need to gather and spread sufficient information regarding a company’s financial solvency to make an informed decision. This is typically done in Excel. To spread financial statements in Excel, lenders create a dynamic DSCR formula. That means using successive cells, such as A2 and A3, for “net operating income” and “debt service,” and placing the respective figures from the income statement in the adjacent cells. Then, in the next cells, the formula for calculating the DSCR.
The Trouble With Financial Spreading in Excel
Imagine having to do this for every single loan application. That is three years of tax returns for the primary borrower, three years for every affiliate and/or guarantor, and if the company is a franchise, three years of returns for every franchise. That is a ton of data to key in manually, which makes the whole process prone to human error. Not to mention that, in the end, it’s not always a lucrative use of time. A lender may spend hours assessing a business’s financial records only to decide it is too risky and deny the application.
Downsides to manual spreading:
- Prone to error
- Doesn’t guarantee revenue
Isn’t There a Better Way?
Until recently, there was no better way to do it. Financial statements are in no way uniform. Not only does the IRS change tax forms from year to year, but every business, along with its financial records, is unique. Much of how financial statements are prepared depends largely on who at the company put them together, which (if any) software they use, etc. And, just as every business is unique, every lender has its own processes for assessing risk.
Because of the lack of standardization in the presentation of financial information, as well as in DSCR calculations, manual spreading has been the industry standard for decades. Thankfully for lenders, technology has advanced to the point of being able to handle the complexity and variability of the process.
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Automated Financial Spreading
Newly developed technologies like optical character recognition (OCR) and artificial intelligence (AI) have been used to create software that can scan tax returns and extract key information. Solutions like FlashSpread enable lenders to upload scanned tax returns to a platform that automatically generates reports on cash flow, balance sheets, income statements, entity cash flow, individual cash flow and global analysis.
Automated spreading enables lenders to make accurate and informed decisions quickly, which saves time and associated labor costs. It also enables lenders to process more applications, issue more loans and generate more revenue.
Benefits to automated spreading:
- Spread returns in minutes
- Get deep insights from automatic reporting
- Accurate DSCR
- Process applications faster
- Save on labor costs
- Increase revenue
- Build reputation with customers
Choosing the Right Financial Spreading Solution
Speed and accuracy are obvious baseline expectations of an automated financial spreading solution. The platform should automatically populate information, perform calculations, alert you to missing or incorrect data and generate an accurate DSCR in minutes. But that’s not all.
Because of the variability of tax forms, financial statements, and risk calculations, it is essential that lenders looking to automate financial spreading get configurable no-code solutions that integrate easily into their processes and operations.
Configurable solutions are important because every lender has its own unique process for calculating risk, so spreading software can’t be a one-size-fits-all solution. But, it also shouldn’t require a team of full-stack developers to use. No-code solutions make it easy enough for any lender to configure their solution to critical workflows.
Easy integration is also essential. Not only should digital spreading solutions be easy to implement into your operations, but they should also play well with other software utilized in your lending cycle. Solutions that don’t can create information silos that reduce visibility and efficiency.
Financial spreading software should:
- Accurately scan and read tax returns
- Speedily generate accurate DSCR
- Configure easily to workflows
- Require no coding skills (no-code)
- Integrate easily with other software
The FlashSpread platform was designed with these key considerations in mind. Not only is the platform intuitive to use, it is a configurable, no-code solution that can integrate easily into any lender’s operations. FlashSpread also uses intelligent API to keep up with changes in tax forms from the IRS, so you don’t have to. After the initial installation, lenders can simply upload scanned tax returns to the platform and generate an accurate DSCR in minutes.
Schedule a demo to learn how.