Rules of thumb for loans

Wednesday, August 29, 2007 at 11:47AM
Joey Brannon in General

I had a frank discussion with a commercial lender yesterday and he gave me the following tidbits of information that may prove useful to some business owners.

He's looking for a 120% coverage ratio on business loans. This means that there is enough cash left from operations to cover 120% of the loan payment. If the entity is a passthrough (S Corp, sole prop, or partnership) the 120% coverage applies to both personal and business debts when everything is grouped together.

On soft lines of credit (those not secured by hard assets such as equipment or real estate) he determines that maximum line amount by adding 75% of receivables aged 90 days or less and 50% of inventory. Sometimes the receivables measure drops to 65% of outstanding balances aged 90 days or less.

Some banks quote line amounts based on revenues, while others will use coverage ratios. I thought it was interesting to hear this approach as well. Let me know if this information was useful.

Article originally appeared on Axiom CPA, P.A. (http://www.axiomcpa.com/).