Post-closing liquidity

The cash and other liquid assets a borrower or guarantor still holds after paying the down payment and closing costs on a loan.

Post-closing liquidity is what is left in the bank once the deal is done. A lender cares because a property with a vacancy or a business in a slow quarter is carried by the owner’s cash, not by net worth tied up in real estate.

One published test is Fannie Mae’s for small multifamily loans, meaning $9 million or less. The combined post-closing liquid assets of the borrower and key principals must equal at least nine monthly payments of principal and interest, not counting cash-out proceeds from the loan, and their combined net worth must be at least the loan amount. The lender verifies liquid assets with three months of bank and investment statements, and should leave out retirement accounts and notes owed to the borrower unless it can justify counting them.

Example: a monthly payment of $12,000 calls for $108,000 of liquid assets after closing under that test.

Banks and credit unions set their own measures. The OCC’s handbook for examiners says a bank should verify guarantor liquidity, and lists a borrower’s or guarantor’s minimum liquidity among the covenants a loan agreement may carry, so the test can continue for the life of the loan.

Go further

• Amortization and balloon calculator: The monthly payment for a rate and term you enter.
• Deal summary builder: A one-page summary that states your cash after closing.
• Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
• Deal summary builder: Turn the facts of a deal into a clean one-page summary you can copy or print. Nothing is saved or sent.
• Guarantor strength and recourse, explained: A guaranty is the lender's second way out. Whether you sign one, how much it covers and what the lender checks before accepting it shape a commercial loan as much as the rate does.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
• Small balance multifamily loan checklist: Most apartment loans are small. Local banks, credit unions and the agencies' small loan programs all compete for them, and each wants the same core package with a different emphasis.

Related terms

• Guarantor: A person or company that promises to repay a loan if the borrower does not. On a loan to an LLC or corporation, the guarantor is usually an owner.
• Global cash flow: The combined cash flow of a borrower, its owners and their other businesses, set against all of the debt payments those same parties owe.
• Contingent liability: A debt a person or company would owe only if something happens, most often a guaranty of someone else's loan that the borrower then stops paying.
• Loan covenant: A promise in a loan agreement that the borrower will do certain things, or will not, for as long as the loan is outstanding, such as keeping a minimum debt service coverage ratio.
• Small-balance multifamily: A loan on an apartment building of five or more units that falls under a size cap. Each program sets its own cap, so the phrase has no single legal meaning.
• Equity injection (SBA): The cash or other equity an owner puts into an SBA-financed project. A 7(a) start-up or business purchase needs at least 10 percent of total project cost; a 504 project needs 10, 15 or 20 percent.
• SBA Form 413 (Personal Financial Statement): SBA's personal financial statement. Each 20 percent owner and each guarantor except a supplemental guarantor gives one, or the lender's own equivalent, signed and dated within 90 days.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.