Lastly, while your business may be able to service the proposed loan’s payments, banks also want to ensure that your business is not over leveraged – meaning that your business does not have too much debt in comparison to its equity.
Let’s say that the entire market declines or crashes and your revenues fall so low that you are forced to shut down the business. In this situation, would you still be able to repay all your lenders – including this proposed loan?
Thus, lenders look to a safety measure known as the debt-to-equity ratio.
Measuring your debt-to-equity is simply taking your Total Liabilities and dividing them by your company’s total equity.
The higher this ratio, the more risk the business has as it is relying on too much outside debt financing.
A ratio over 3 (meaning that the business has three times the debt as it does equity) is too much risk for most lenders to feel comfortable with.
Most businesses will have a debt-to-equity ratio between 1.5 to 2 and are considered safe to their prospective lender.
Now, if your business does not pass all these tests with flying colors and you still need a small business loan to grow, then it is up to you (the business owner) to manage your company in such a way to bring your business in line with these tests.
It all starts with your understanding of your business and the measures it has to pass to qualify.
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