Q: What if loans to owners are subordinated to the bank loan? Do we still need to deduct those in calculating business "cash flow"?

A: It’s unlikely that repayment of loans to owners would be subordinated to repayment of bank loans. A loan to owners represents cash out for the business and repayment of the loan would be encouraged by third party lenders to strengthen borrower cash flow available to service debt.

New loans to owners may well be restricted as we saw in conducting a global cash flow analysis of the Schumacher companies to conserve operating cash flow. Such loans are cash out the door that reduce the borrower's ability to meet its debt service and quick repayment is encouraged.

Repayment of a loan from owner would certainly be a prime candidate for subordination of repayment of a bank loan to preserve cash flow and better enable to borrower to service third party debt. Our intent in doing so would be retain cash flow and avoid the circumstance of an owner getting repaid before our lending institution. A further importance of a subordinating an owner loan to the company is that the lender gets paid before the owners in liquidation, which is a separate event from current and global cash flow for a specific time period.

An inherent responsibility we carry in the event that a loan from owners is subordinated is to verify that no payment is indeed made to owners. If a payment is made on a subordinated owner loan to company, it is our responsibility to show the payments as a cash outflow.

Course overview: Global Cash Flow