How should loans to S Corp shareholder(s) be looked at in underwriting a loan? Income? Debt? In a negative way?
Great question and one we often don't consider. My standard cashflow worksheet does not include a place to indicate loans made to shareholders in the same way it has a place to enter shareholder distributions, for example. And I have trained banks all over the country with standard and proprietary software and do not see this routinely considered.
But it makes sense that we should consider it since borrowing from their company is one of the ways an S-Corp shareholder can take money out of the company. Others are wages, rent if s/he owns the building, and distributions of capital.
In a closely-held s-corporation, the choice about whether to pay wages, distributions or take loans is often related to tax impact or uneven needs of the shareholders. If only one shareholder 'needs' extra funds why would the other shareholders let him/her take uneven distributions? So I don't think loans to shareholders is inherently negative but understanding the impact is key.
This is where a global cashflow approach makes a lot of sense. If you combine the cashflow analysis of the business with the major shareholders who will be your guarantors, then don't count the loan payments against company cashflow or for shareholder cashflow. It should wash.
Another thing to pay attention to is liquidity. If loans to shareholders is increasing and cash balances are too low, that is a red flag. You'll need the full 1120S to see the balance sheets, but clearly you have them or you would not have noticed the loans to shareholders.
Finally, if loans to shareholders is dropping that indicates that shareholders are paying back to the company. At the very least, if you focus is the company, you might want to see or prepare a Statement of Cashflows so you are very clear where the money is coming from and where it is going.
If you were using my cashflow worksheet and in your judgment the loans to shareholders should be considered like distributions because of their size or consistency, you could enter it as a negative to the business either on an 'additional expense' line or even on the line for distributions if you explained it. Just be sure that you don't then combine the business with the personal analysis without backing it back out.