Small business looks for growth. Large business looks for getting bigger. To secure the financing at reasonable rate is critical for all size of companies aiming for a sustainable grow. When bankers start reviewing the loan application, they are basically looking for the following 3 key ratios:

Current ratio

Liquidity is critical to business. Current ratio is one of the liquidity ratios that measure the amount of cash or cash-like assets on the balance sheet can satisfy short-term/current obligation within the business. Before the business becomes profitable, it needs to survive first and has sufficient fund to pay off the obligation in the near term. The Current ratio measures how well the business can meet its short-term obligations. To get the Current ratio, divide current assets (cash, receivables, inventory) by current liabilities (those due within one year). Another key concept is working capital, which is simply determined by subtracting current liabilities from current assets. Generally, the current ratio is expected to be over 1 or higher.

Loan to tangible net worth

This ratio is calculated by the total amount of the loan divided by the appraised value of the collateral. Bankers use this ratio to assess how much cushion they have based on the size of loan in case the value collateral drops. If the worst scenario occurs, bankers may need to sell the collateral to cover the remaining balance of the loan. Generally, the loan to tangible net worth ratio is expected to be 75% or lower, depending on lenders’ appetite.

Debt service coverage

Other than the above ratios, bankers also typically review the financials/projection to assess the applicant’s ability to pay off debt from cash flow generated from operation. How to determine this ratio? Simply use EBITDA (earnings before interest, taxes, depreciation and amortization) and divides it by total debt obligations, which include principal and interest. Debt to service coverage ratio also expected to be 1.25, depending on the industry, some bankers may even ask for 1.75 on the projected income statement.

Other than those quantitative measurements, bankers also review the applicant’s experience and career path carefully as they want to see what the business owner is capable of. Bankers expect business owners should know the business inside out, properly address business cycles, risk and corresponding strategy to deal with challenges. I am sure all those will bring a lot of confidence to bankers when approving the loan.

Those 3 ratios are critical for your business loan application. It may take time to figure out how those work on your financials. One suggestion is to talk to your banker as well as accountant to sort out the requirements earlier before you need the loan.