The banker has likely told you to bring in the financial statements of your small business before he helps you get a loan. After talking to the banker you wonder if he even looked at the statements. Chances are, he didn’t . The initial decision of whether a bank will entertain the option to provide you a loan is based more on ratios than on the actual numbers. The ratio of your financial statements will let the banker know if you will be able to pay and if you will pay.
The key to getting that loan is to know how to work the ratios in your favor. A banker wants to know if you can repay the loan. To determine this his finance department will calculate a cash coverage ratio. Find the sum of the net income, the amortization expense and the depreciation expenses. This is the net cash flow of what is left when all of the businesses bills are paid. Divide the sum by the annual payments of the loan you want to take. This is the cash coverage ratio. The banker likes to find a 1.5 or above ratio. To make this ratio work for you simply add your spouses income and any additional income that you have, these can be considered in determining the ratio.
Your credit score will be used to predict if you will pay your future debts, whether short term loans or expensive home mortgages. Your history report will be used to calculate a debt to worth ratio. Divide the shareholders equity by the amount that you owe (your liabilities). This ratio should be less than four times the equity at the most. A lower number will be better. To make this ratio work for you, tell the bank if any of your debtors will allow the bank to collect their loans first. The other loan is then considered equity.
