What's a Ratio?
The most common way loans are evaluated involves mathematical calculations called ratios. Although they vary for different industries, lending institutions look your ratios to determine loan eligibility. From the ratio, they can tell if an applicant faces cash flow problems.
An acceptable debt to equity ratio for a lender to consider your loan is usually about 2:1; more than 2:1, is getting into a risky territory where most lenders don't like to venture. The more debt cuts into the business, the more difficult it is for a company to service the debt. Banks want to see in your cash flow an ability to pay off debt.
Beyond the debt to equity ratio lenders can look at your current ratio, which compares current assets to current liabilities. In other words, how your accounts receivable offset your accounts payable. They look at your working capital and inventory funding compared to current liabilities.
How you manage your receivables can also impact your current ratio. Well-structured business processes can ensure that you present an acceptable current ratio to the bank.
Smart tip: Know how to package your financial statements to reflect a debt to equity ratio and current ratio acceptable to your lender. If your ratios look out of sync with your industry, be able to explain why.
Introduction
The Loan Application
Credit Rating
The Numbers Please
What's a Ratio?
Financing, not Accounting
Business History
Strikes Against You
Do You Qualify for a Loan?
