Case 01 / Commercial credit

Fictional borrower · By Aaron Dhillon

Financing the
next shift.

A practical exploration of Canadian lending. Financial statements, cash flow, and the judgment that connects the numbers to a credit decision.

Explore the first case ↗Run a stress test

Banking Advisor · Economics graduate · Building toward credit analysis

01Complete lending case

3 yearsIllustrative financial history

4 variablesInteractive sensitivity model

1 decisionSupported by a credit memo

Economic link / Author interpretation: The September policy decision identifies trade and cost uncertainty [1]. A manufacturer can face weaker orders and higher input costs at the same time. The revenue and margin controls below test these channels separately; the scenarios are assumptions, not predictions. Read the economic brief ↗

Client behaviour & discovery

Management may postpone equipment investment, pass costs to customers, increase inventory, or draw on operating credit. Each response affects cash differently. Ask which orders are committed, how much pricing flexibility exists, and whether receivables collections have slowed.

Do not infer repayment capacity from management’s confidence alone. Corroborate the growth narrative with contracts, invoices, inventory turnover, and an aged receivables report.

01 / Understand the borrower

Growth is the opportunity.
Repayment is the question.

Maple Ridge Components Ltd. is a fictional Ontario precision-parts manufacturer. It seeks $750,000 to replace equipment and expand production capacity.

The business & the request

OntarioManufacturingEquipment finance

Established operations serve industrial customers. Revenue has grown, but raw-material costs, customer concentration, and working-capital needs could absorb the benefit of expansion.

Proposed use: $900,000 equipment investment, funded by a $750,000 term loan and $150,000 owner contribution.

No speculative expansion earnings are included in the base repayment model. All amounts are CAD. Figures are invented for this portfolio exercise.

Three-year financial snapshot

CAD thousands	Year 1	Year 2	Year 3
Revenue	3,800	4,200	4,600
EBITDA	456	525	598
EBITDA margin	12.0%	12.5%	13.0%
Current assets	850	970	1,100
Current liabilities	510	570	620
Existing debt	720	630	540
Net working capital	340	400	480

Year 3 current ratio: 1.77×. Pro forma debt / EBITDA: 2.16×, before any cash netting.

02 / Test the downside

Change the assumptions.
Watch the cushion move.

Compare cash available for debt service with existing obligations and the proposed loan. The analysis uses an illustrative 1.25× coverage benchmark, not a lender’s policy.

Revenue change

EBITDA margin

Annual loan interest rate

Amortization period

Fixed assumptions: $750,000 loan; $120,000 existing annual debt service; $90,000 cash taxes; $70,000 maintenance capital spending; $30,000 additional working capital.

Debt-service coverage ratio

Coverage benchmark: 1.25× · Display scale: 0–2.5×

Annual EBITDA

Cash available for debt service

New loan / monthly payment

Total annual debt service

03 / Make the call

The credit memorandum.

ILLUSTRATIVE ANALYST RECOMMENDATION

Approve conditionally, with a narrower risk appetite.

The base case produces approximately $408,000 in cash available for debt service against $298,211 in total annual debt payments: 1.37× coverage. The business can service the proposed structure under the stated assumptions, but the cushion is modest.

A 10% revenue decline combined with an 11.5% EBITDA margin and a 9% borrowing rate reduces coverage to approximately 0.93×. Expansion should therefore depend on verified cash flow and a satisfactory downside plan.

Conditions before advancing funds

Verify financial statements, tax obligations, receivables quality, and existing debt schedules.
Confirm the $150,000 owner contribution and equipment invoices before funding.
Complete equipment security, valuation, and legal due diligence.
Assess customer concentration and obtain evidence supporting the order pipeline.
Revisit loan size or owner equity if validated cash flow does not support the downside.

Monitoring proposal

Quarterly financial reporting and receivables aging; annual review of coverage and leverage; an illustrative minimum 1.25× cash-based coverage covenant, with definitions agreed before closing. A covenant flags deterioration; it does not replace a repayment source.

Why use a 1.25× coverage benchmark?

It is an illustrative hurdle chosen to make the cash-flow cushion visible. It is not RBC policy or a universal commercial-lending requirement. The cash-based numerator also differs from EBITDA-based DSCR definitions, so comparisons require consistent definitions.

Why hold taxes and working capital constant in the downturn?

This simplified sensitivity isolates revenue, margin, and financing assumptions. In practice, cash taxes and working capital can change with sales and profitability. Holding them fixed may overstate or understate stress; a full forecast would model those relationships.

What would change the decision?

Lower sustainable margins, materially overdue receivables, reliance on one customer, or unverified owner equity would weaken the recommendation. Confirmed recurring cash generation and lower borrowing needs would strengthen it.

04 / Look beyond the ratio

Where the risk lives.

Customer concentration

A lost contract can reduce both revenue and plant utilization. Review revenue by customer and renewal terms.

Working-capital pressure

Higher sales can tie up cash in inventory and receivables. Growth does not automatically create repayment capacity.

Execution & cost exposure

Equipment delays, input-cost increases, and weaker utilization can compress the cash-flow cushion.

Methodology / Transparent by design

Know what’s in the model.

How is debt-service coverage calculated?

Cash available = revenue × EBITDA margin − cash taxes − maintenance capital spending − additional working capital. DSCR = cash available ÷ (existing annual debt service + 12 × new monthly loan payment).

How are loan payments calculated?

Fully amortizing monthly payments use P × r ÷ [1 − (1 + r)⁻ⁿ], where P is $750,000, r is the stated annual rate divided by 12, and n is amortization years × 12. This is a modeling convention; actual credit agreements may use different conventions.

What are the limitations?

This simplified model holds taxes, maintenance spending, working capital, and existing debt service constant across scenarios. It excludes fees, seasonality, cash balances, depreciation schedules, tax-loss effects, collateral recovery, and default probabilities. Margins and sales are independently adjustable assumptions.

Where does the information come from?

All borrower names, financial statements, rates, and scenario inputs are fictional. This independent educational project contains no RBC client data or internal policies and is not an RBC publication. It is not a loan offer or financial advice.