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4 numbers you need to know when applying for a business loan

Monitoring these figures can help you find the right lender and speed up your application.

Having a strong grasp of your business’s finances is key to finding the right kind of loan. Knowing your business’s current ratio, debt service coverage ratio, net operating income and business credit score can help you determine if you qualify for a loan with good terms and rates. If one of these numbers is too low or high, that could be a sign your business will have trouble qualifying for a loan — or that it might not be the right time.

1. Current ratio

Current ratio = Current assets / Current liabilities

Your business’s current ratio is its current assets divided by its current liabilities. Lenders and other types of creditors often look at your business’s current ratio formula to get an idea of your business’s ability to pay off debts within the next year.

What counts as a current asset and current liability?

A current asset is anything your business owns that can be exchanged for cash within a year. That means money in your business’s bank accounts, stocks, bonds, accounts receivable and inventory all count as current assets. But equipment and real estate don’t.

A current liability is any financial obligation that your business must pay in a year. For example, short-term loans, annual payment obligations on long-term loans, taxes and accounts payable all count as liabilities. The total cost of a long-term loan like a mortgage doesn’t count as a current liability.

What’s a good current ratio?

An ideal current ratio is between 1.2 and 2. Here’s what this number says about your business’s short-term financial wellbeing:

  • Below 1. Your business probably can’t afford to take on any more debt.
  • Equal to 1. Your current assets and liabilities are equal. You still might be able to get a loan, though you might not get the best rate.
  • Above 2. Your business may not be using its short-term assets, like inventory, efficiently.

Why you need to know your business’s current ratio

Seeing how your business’s current ratio changes over time can highlight when your business is doing well and when it isn’t. If your business has a current ratio that increases over time, that could be a sign that your business’s finances are improving. But it could also be a sign that you have an overstock of inventory, since that counts as an asset. A decreasing current ratio might be a signal that your business is in financial trouble, however.

2. Net operating income

Net operating income = Gross operating income – Operating expenses

Your business’s net operating income (NOI) is the total amount of money it makes minus the cost of keeping things up and running. It’s most often used by real estate investors who want to know if it’s worth investing in a commercial property. In fact, lenders don’t always look at your business’s NOI directly. But you need to know it to calculate another number that lenders consider: your business’s debt service coverage ratio (DSCR) — we’ll get to that next.

What’s my gross operating income?

For the purpose of a DSCR, your business’s gross operating income is all of the money it brings in each year before it pays its taxes. In other words, your business’s revenue.

What are my operating expenses?

Operating expenses are the costs of keeping your business’s doors open. This includes payroll, rent, inventory and other costs of production. It includes property taxes, but not income taxes. It also doesn’t include interest or principal payments on business loans and non-recurring business expenses.

3. Debt service coverage ratio

Debt service coverage ratio = Net operating income / This year’s debt obligations

Your business’s debt service coverage ratio is its net operating income divided by the amount it has to pay on loans, interest and fees over the current fiscal year. Lenders look at your business’s DSCR when you apply for a loan to get a general idea of its financial health and more specifically, its ability to repay debt.

What’s a good DSCR?

A DSCR of 1.25 or higher is typically considered good. Here’s what your number says about your business’s financial health:

  • Above 1. Your business has extra money to pay off debts.
  • Exactly 1. Your debt obligations and net operating income are equal, and you might be able to afford taking on a little more debt.
  • Below 1. Your business isn’t making enough income to pay off its debts.

Why you need to know your DSCR

A healthy DSCR can get your business lower rates, larger loan amounts and more favorable terms. Your DSCR is particularly important when applying for an SBA loan, bank loan or commercial real estate financing, though some online lenders also take it into consideration.

Many lenders have a minimum DSCR, and some even require that borrowers keep that DSCR while you repay the loan. In these cases, if your business’s DSCR drops below the minimum, your lender might request that your business pay off your loan’s balance in full within three to four months.

Knowing your business’s DSCR is also a good way to keep track of your business’s financial health. If you notice your DSCR drop, you might want to cut back on operating expenses, work to increase revenue or focus on paying off your current debts before applying for a loan. If you need financing, you might want to consider equity investments or crowdfunding.

How to calculate your DSCR

4. Business credit score

Your business’s credit score is another factor that some lenders consider — though it’s not as important as your personal credit score. Your business credit score is a number between 0 and 100 based on your past relationships with banks, lenders and vendors. Equifax, Experian and Dun & Bradstreet are the three major credit bureaus that calculate your business’s credit score.

One of the reasons business credit scores aren’t as widely used as personal credit scores is because they aren’t standardized. Different credit bureaus use different algorithms to calculate your score, meaning it can vary depending on which bureau you go to. Generally, the higher your business credit score, the better.

How business credit scores work

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What else should I know before I apply for a business loan?

There’s a chance you won’t have to provide your current ratio, DSCR or NOI when you apply for a business loan. Instead, your lender may ask for the following information:

  • Personal credit score. Many lenders have cutoffs for the personal credit score of each business owner that has more than a 20% stake in the company.
  • Revenue. Most business loan providers also have minimum annual or monthly revenue requirements, often starting at around $100,000 a year or $10,000 a month.
  • Business debt obligations. It’s likely that your lender will ask how much your business owes each month in repayments on loans and other types of credit. You should have an idea of this if you’ve already calculated your business’s DSCR.
  • Value of personal assets. Some lenders require a personal guarantee from all business owners, meaning that you’ll be responsible for paying off the loan if your business can’t.
  • Value of collateral. If you’re getting a business loan secured by a specific business asset, your lender will likely ask for its market value during the application.

Other business loan requirements

Bottom line

Being familiar with your business’s current ratio, net operating income, DSCR and credit score can help you find the right type of financing for your business — or decide if you need it at all. Beyond getting a loan, monitoring these numbers can also help you keep your business’s finances on track.

Interested in learning about other ways to find business financing? Ready to compare lenders? Check out our guide to business loans.

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