Guides
Average daily balance decides your offer more than revenue does
How average daily balance is calculated, why it outranks revenue in underwriting, and two timing changes that raised one real balance from $9,400 to $14,600.
Average daily balance is the mean of your account balance at the close of every day in the statement period, weekends and holidays included. It is one line on your statement, it takes thirty seconds to calculate, and it moves your funding offer further than any other number on the page, including revenue.
Owners find this counterintuitive, because revenue is the number they run the business on. Underwriters do not think that way. Revenue tells them the business sells something. The balance tells them whether the business can survive a $553 debit on a Tuesday when a customer pays late. Only one of those two questions is about getting paid back.
How it is actually calculated
Add the closing balance for every calendar day in the period, then divide by the number of days. That is it. There is no weighting, no exclusion of weekends, and no adjustment for pending items.
| Day | Activity | Closing balance |
|---|---|---|
| 1 (Mon) | Opening | $12,400 |
| 2 (Tue) | Fuel and payroll taxes out | $9,850 |
| 3 (Wed) | Insurance draft | $7,200 |
| 4 (Thu) | Two customer deposits | $14,600 |
| 5 (Fri) | No activity | $14,600 |
| 6 (Sat) | Weekend, balance carries | $14,600 |
| 7 (Sun) | Weekend, balance carries | $14,600 |
| 8 (Mon) | Vendor ACH | $11,050 |
| 9 (Tue) | Payroll | $6,900 |
| 10 (Wed) | Rent | $3,100 |
| Ten day total | $110,100 | |
| Full 30 day total | Leaner second half | $282,000 |
| Average daily balance | $282,000 divided by 30 | $9,400 |
Notice days 5, 6 and 7. That one Friday balance of $14,600 gets counted three times, because Saturday and Sunday close at whatever Friday closed at. Every weekend triples the weight of Friday's balance. That single mechanic is the reason two businesses with identical cash flow can post very different balances.
The ratio underwriters actually use
The raw dollar figure means nothing by itself. A $9,400 balance is excellent for a business doing $40,000 a month and thin for one doing $600,000. Underwriters divide it by average monthly revenue and read the percentage.
- Under 2 percent
- The account runs dry most of the month. Expect the smallest offers, the highest factors, and short terms, if there is an offer at all.
- 3 to 5 percent
- Common and workable. This is the middle of the market and it prices in the middle of the market.
- 6 to 10 percent
- Strong for a working capital file. This is where factors start to compress and terms start to lengthen.
- Over 12 percent
- Opens doors beyond advances entirely. A line of credit or a term loan becomes realistic, and those cost a fraction of an advance.
Our example business deposits $120,000 a month and holds a $9,400 average balance. That is 7.8 percent, which reads as solid. The same business with the same revenue and an $1,800 balance is at 1.5 percent, and it will be offered roughly a third as much at a materially worse factor. Both businesses have identical sales. See how lenders read bank statements for that comparison in full.
The cushion test you can run yourself
There is a second test, and it is the one that decides whether an offer is affordable rather than whether it is available. Divide your average daily balance by the proposed daily payment. The answer is how many payment days of cushion you carry.
At a $9,400 balance against a $553 daily debit, that is 17 days of cushion. Comfortable. At an $1,800 balance against the same debit, it is 3.3 days, which means one slow week produces an NSF and the first NSF usually produces a second. Most desks want to see at least ten days. Run this before you accept anything, because a funder will approve an amount your cushion cannot carry.
One caution on which figure to use. Banks print two versions and they are not the same. Average ledger balance counts every deposit the moment it posts. Average collected balance excludes deposits that have not cleared yet, so it reads lower, sometimes much lower if you take a lot of checks. Underwriters generally read whichever one your statement prints, so if your bank shows both, look at the collected figure and assume that is the one being evaluated.
Two timing changes that move it, with the arithmetic
You do not need more revenue to raise this number. You need the same money to sit still longer. Here is what two ordinary changes did to the $9,400 balance above.
- Move the big vendor draft from Friday to Monday. A $20,000 draft that clears Friday keeps the balance $20,000 lower for Friday, Saturday and Sunday. Move it to Monday and those three days stay high. Three days at $20,000 divided by 30 days is plus $2,000 on the monthly average, for a phone call to accounts payable.
- Stop the nightly sweep. Sweeping an average of $3,200 a night into a savings account or a personal account removes exactly that from the operating balance every single day. Leaving it in is plus $3,200. The money is not spent, it is just visible.
- Do both and the balance goes from $9,400 to $14,600, which moves the ratio from 7.8 percent to 12.2 percent of revenue. Nothing about the business changed. Nobody sold anything extra.
- Deposit daily rather than batching weekly. Money in the account on Tuesday counts for Tuesday. Money that sits in a drawer until Friday counts for nothing, and it also lowers your deposit count, which is a second penalty for the same habit.
- Time owner draws for after the statement closes, not the day before. A $15,000 draw on the 29th costs you two days of weight. The same draw on the 2nd costs you twenty eight.
You cannot fix three months of statements in a week. You can fix them in two, and it is usually worth more than any rate you could negotiate.
Where it shows up beyond the offer size
The balance is not only a sizing input. It follows you through the deal.
- Position. A funder considering a second position looks at whether the balance can carry two debits at once. Usually it cannot, which is the real reason stacking gets declined more often than it gets approved.
- Reconciliation. When you ask a funder to reduce payments in a slow month, they look at the balance trend first. A balance that was already flat at zero reads as a business that was going to miss regardless.
- Renewal pricing. Funders re-underwrite at renewal. A balance that fell during the term because the daily debit consumed it will produce a worse renewal offer than the original, even with perfect payment history.
- Term loans and lines. Bank products test balances against covenants and against debt service coverage. A thin balance closes those doors before credit is even discussed.
What we do with this
Exp Capital Solutions is a broker. We do not fund, price or approve anything. Before we submit a file we calculate your balance ratio and your cushion days and tell you what an underwriter is going to conclude, in advance. When the balance is thin, we will often tell you to spend sixty days fixing it instead of taking the offer that is available today, because the repricing is usually worth more than the delay costs. That advice loses us deals. We give it because a file that funds and then defaults is worth nothing to anyone.