When underwriting an annual debt service requirement for a business line of credit, which interest figure is recommended?

When underwriting an annual debt service requirement for a business line of credit, it is recommended to use the interest that would be paid over the next 12 months assuming a fully extended line. This approach provides a forward-looking perspective that accounts for the maximum potential usage of the credit line. By considering the fully extended line, it allows for an assessment of the maximum interest obligation the business may face, enabling lenders to determine the borrower's ability to manage debt under worst-case scenarios.

This conservative estimate is vital for effective risk assessment because it ensures that the business can cover the interest payments regardless of its cash flow fluctuations. In times of unexpected financial strain, having this estimate helps in gauging whether the business can sustain its debt service without jeopardizing its operations.

Utilizing anticipated future interest rather than historical figures allows for more accurate financial planning and risk management, ensuring that decisions are based on potential future circumstances rather than past usage patterns that may not reflect the business's current or future situation.