The number owners do not know.

This is the first of what will be 4 letters a year. Each 1 is written from the desk, not from a marketing calendar, and each 1 covers what the files actually showed. There will be no forecasts in these letters and no market calls. There will be arithmetic, documents, and the questions we wish owners had asked a quarter earlier.

1. The number

Ask an owner carrying 3 advance positions what the stack costs and the answer is nearly always a factor rate. 1.32. 1.28. A factor rate is a price, not a cost. The cost depends on how many days remain on each position, and it changes every morning the remittance clears. The same 1.32 that reads as 32 percent over a year reads as something far higher over the 5 months the contract actually runs, and higher again once the second and third positions are layered on top of the first, each 1 collected from the same deposits.

The number an owner needs is the effective annualized cost of the whole stack, today, at the remaining term of each position. It is the first figure we compute on every refinance file, and it is the figure that decides whether a buyout produces relief or merely rearranges the debits. Owners who can state it negotiate differently. Owners who cannot are negotiating against a number the other side already knows.

The arithmetic is in the brief on the true cost of a stacked position, and the working is in the glossary under true cost. It takes 20 minutes with the contracts and a calculator. It should not take a mandate.

2. Where the read starts

The application is what an owner says about the business. The bank statements are what the business says about itself, and every underwriter we place with reads them first. Deposits by month. Balances at the low point of each month. Returned items. The existing debits, counted and totaled. Only after those 4 things are written down does anyone open the financial statements, and only after the financial statements does anyone read the story.

The consequence is simple and mostly ignored. A file prepared in the same order the reader uses arrives answering questions. A file prepared in the order the owner finds natural, story first and statements last, arrives raising them, and every question raised at the read is priced into the term sheet. The most useful document we published this quarter is not an insight. It is the funding file checklist, 2 pages, the 5 things a lender reads first and the order to assemble them in.

3. 1 word, 2 products

The word is consolidation. In the advance market it is attached to 2 products that do opposite things. A reverse consolidation puts new advance money into the account to cover the existing daily debits while every position underneath stays alive; the total owed goes up. A position buyout pays every position in full at closing through a collateral backed facility; the daily debits stop at funding and 1 monthly payment remains.

Owners are sold the first while believing they are buying the second, and the confusion is not accidental. 4 questions expose any offer in a single call: does every existing position get paid in full at closing, directly to the funder, against a written payoff letter; what is the total obligation the day after funding, and to whom; do the daily debits stop; and which positions have a lien release in the closing documents. The questions are set out in the brief on the difference. Ask them of us as well. We will answer them in writing.

4. What changed at the firm

3 things. First, credit advisory is now a separate engagement: how to read the owner's personal report and the company's business file the way a lender reads them, how to review each for accuracy through the free official channels, and how to manage the obligations behind them on a routine. It is educational, it is not credit repair, it is never a condition of a placement, and it promises no score, deletion or funding outcome. The 6 credit briefs behind it are published in full.

Second, the firm opened a buyer registry for acquirers, investors and lenders who want to see the sell side mandates we run, matched by sector, size and geography, with a 1 page overview sent when a mandate fits and the full file following an NDA. Third, the reference shelf grew: 4 printable field guides, a 42 term glossary, a directory of 71 reporting companies, and 6 industry pages on how the read runs in trucking, medical and dental practices, restaurants, construction, dealerships and manufacturing.

None of it is a product. All of it is the file, prepared earlier.

5. 3 things before December

1. Compute the number. If the business carries advance positions, put the contracts on the desk and compute the effective annualized cost of the stack at the remaining term of each position. Write it down. It is the beginning of every decision that follows.

2. Assemble the file in the reader's order. 6 months of business bank statements, the debt schedule, the position schedule, the financial statements, and 1 page of notes explaining every anomaly before it is asked about. Keep the file current; a file that is 3 months stale is a new file.

3. Read the paper before the pitch. Every offer, ours included, can be reduced to the 4 questions and a payoff letter. An offer that cannot survive the questions does not survive underwriting either; it just costs more to find out.

The next letter is due in December. Until then the desk is open: send the file, and you get a straight read within 2 business days.

Arnold Bhikhai
Principal, Citadel Ridge LLC

The Ridgeline Letter is educational and describes how the firm reads files and how underwriting is commonly performed. It is not a description of any lender's program, an offer or solicitation of financing or securities, legal, tax, accounting or investment advice, or a guarantee of any outcome. Every facility is subject to lender underwriting and approval.