What Numbers Do Bankers Care About Most?

Did you know that bankers can sometimes give a financial document a quick glance to figure out the answer whether you’ll be accepted for a loan? More analysis is used when making a final decision, however, initially quickly identifying certain numbers is the key to finding the answer.

bankers-1 Here’s how loan decisions work: A credit department at a bank will put your financial statement through a program that determines certain ratios, which are derived from important income statement and balance sheet numbers. These ratios will help a banker determine the answers to three essential questions: Can you pay? Will you pay? And, what if you don’t pay?

If you’re looking to secure a loan, first it’s important to comprehend how these ratios play a part in the bank’s decision making, and how you can make them work in your favor. To find out these numbers, bankers must determine the following:

Can you pay?

To determine whether you can afford a loan, the banker will find your “cash coverage ratio,” which is calculated by adding back depreciation and amortization to your net income. This will help the lender know about what your net cash flow is like, i.e. how much you pay in bills and how much extra you have left over. They’ll then take that number and divide it by yearly loan payments. That number is the cash coverage ratio — and the magic number bankers look for is a ratio of 1.5 or higher. That means that if the loan requires $20,000 a year, the receiver must have a net cash flow of $30,000.

What you can do: If the numbers don’t add up, a secondary source of income, whether your spouse’s or another personal source, may be considered, so be sure to let your bank know if that’s your case.

bankers-2Will you pay?

You may be able to afford a potential loan, but bankers ultimately want to know whether you will for sure pay it. While a banker will take into account your personal and business credit score, your “debt to worth ratio” is the number they need that can determine how you’ll handle payments in the future. This number is determined by dividing shareholders’ equity by total liabilities, found on your balance sheet. A banker will want to see that your debt is no more than three or four times your equity. The debt to worth ratio helps bank determine whether you’re a high or low risk. If you have an exceedingly high amount of finances, you’ll be deemed high risk.

What you can do. If you have any “friendly debt,” such as a loan from a friend or family member that would allow you to pay the bank off before them, the lender may be able to call that number equity instead of debt, which could significantly improve your ratio.

What if you don’t pay?

“If the worst happens, a lender wants to know there are tangible assets that can be liquidated to pay off the loan,” explains Kate Lister, former banker, small-business investor and veteran entrepreneur, in an article on Entreprenuer.com. “Hard assets of equal or greater value collateralize the majority of small-business loans upward of $50,000 or by a general filing of all business assets.”

For example, say you spent $50,000 on equipment a month ago, but the lender says its value is $20,000. That happens because most of the time, if the bank sells it, they won’t get back the full price. Estimates of ratios of assorted collateral that a bank assigns are as follows:

Accounts receivable: 20 percent to 85 percent

Inventory: 10 percent to 80 percent

Furniture and equipment: 10 percent to 80 percent

Business or personal real estate: 50 percent to 90 percent

Cash/investments: 50 percent to 90 percent.

The quality and marketability are the determining factors of where on the spectrum the value falls.

What you can do: Doing things to improve the salability of your assets will also improve your collateral case. Also, it’s important to know that these ratio expectations can alter based on strong cash flow and other factors.

“The final loan decision will take into account many factors, financial and otherwise, but to a lender, ratios are like the jacket copy on a book,” Lister notes. “If they don’t read well, your lender may not bother to look any further.”

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