Ratios Make the (Banking) World Go Round
What ratios are important to Lenders
By: Aaron Dyer
A 20th century visionary once said, ―We are living in
a material world‖ and truer words could not be
spoken. The fact is that our society revolves around
the material- numbers and ratios are a large part of
the economic structure of corporate America. In
order to achieve something great you have to start
at the ground and build your way up, but that
building is going to likely take additional funding
from outside sources. The role of ratios in the final
decision of a lender is integral. An intelligent
entrepreneur will take steps in learning the various
types of financial ratios used to analyze business
financial statements. This article will work to
demystify this world of ratios and ultimately add to
your toolkit for getting your loan and building your
future.
Borrower Ratios
Current Ratio - This ratio defines the relationship between Current Assets and Current
Liabilities. A greater number of Current Assets are desirable as this offers greater
security that money will be available to cover debts incurred in the following year period.
Time and the quality of the current assets are not addressed in this particular ratio, but
it will give a small framework with which to further construct your plans.
FORMULA: Current Assets
Current Liabilities
The appropriate value for this ratio depends on the characteristics of the firm's industry
and the composition of its Current Assets. However, at a minimum, the Current Ratio
should be greater than one.
Debt to Tangible Net Worth - This ratio measures how many dollars of outside
financing there are for each dollar of owner's equity. A high ratio means high leverage
and high risk.
FORMULA: Total Liabilities - Subordinated Debt + Request
Net Worth – Intangibles + Subordinated Debt
Again, the maximum Debt/TNW Ratio will vary by lending institution and also by
industry. But, a typical maximum ratio would th