Why I Underwrite and Re-Underwrite From Average Daily Balance

When I underwrite a revenue based financing application from a business, the first number I look for is not monthly revenue. It is average daily balance.

And when I re-underwrite a file, or when I re-underwrite all files across the portfolio, I go right back to the same number.

Average Daily Balance Tells Me What the Business Can Afford

Average daily balance tells me how much of an outgoing daily payment a business can actually handle. Once I know that, I can work backward to determine the total size of the funding.

Monthly revenue does not give me that answer. A business can deposit $100,000 in a month and still be broke by the 15th. I have seen it more times than I can count. That revenue number tells me nothing about what the business can afford to pay out every day.

Average daily balance does. It tells me what the business holds onto after payroll, rent, vendors, taxes, and every other obligation clears.

This Is Not a One Time Number

A business that qualified three months ago might look completely different today. Revenue could be flat but the average daily balance dropped. That tells me the breathing room is gone. Expenses went up, or the business took on other obligations, or something changed in the operation. Whatever the reason, the number I underwrote from no longer holds.

That is why I re-underwrite. When I go back through a file or go through all files at once, I am looking at the same thing I looked at the first time. What does the business keep? Can it still afford the outgoing daily payment? Does the funding size still make sense?

The Opposite Is Also True

Sometimes a business grows. The average daily balance goes up. That tells me the business has more room now than it did before. It can support a larger daily payment, which means a larger total funding size makes sense.

Either way the answer comes from the same place. Not revenue. Balance.

From Daily Payment to Deal Size

If a business deposits $5,000 a day but carries an average daily balance of $800, there is almost no room. I cannot size a deal around that. Every dollar is already spoken for.

Take the same business doing $5,000 a day with an average daily balance of $3,500. Now I have something to work with. I can see what the business keeps, determine a daily payment it can afford, and size the total funding from there.

The revenue is the same. The funding size is completely different.

Bottom Line

Average daily balance is the starting point for everything I do. On the first underwrite and on every re-underwrite after that. It tells me what the business can afford to pay daily, and that daily number is what determines how much total funding makes sense. It is the number I come back to every time I touch a file and it tells me more than anything else on the bank statement.