Applying For An SBA Loan: Calculate Business Debt Coverage
Are you interested in an SBA loan? Low cost funds can be a big boon for a thriving small business.
SBA loans can help owners pay off high interest debt, purchase additional inventory, step up marketing efforts, buy equipment or commercial real estate and more.
If you’re ready to apply for an SBA loan, read on to learn valuable information you need to know about the health of your business.
You’ve probably heard that it’s important to get organized and gather required documents before you start the SBA loan application process. That’s absolutely true, but there’s another critical area that needs your attention as well. Do you know what banks look at when deciding to approve your business a loan?
In the past, business owners would submit required paperwork and hope for the best. Now, SmartBiz Loans is empowering entrepreneurs through our new online educational tool, SmartBiz Advisor*. When you sign up for SmartBiz Advisor – at no cost – you’ll learn about the seven key areas banks use to evaluate businesses applying for SBA loans and where your business stands. By answering just a few questions and uploading a recent tax return, SmartBiz Advisor generates your unique Loan Ready Score™.
One of the key areas banks look at is business debt coverage. This is a metric that shows if you have the available cash flow to cover the payments for all debts, including a new SBA loan.
What is Business Debt Coverage?
Business debt coverage** is a key criteria SBA banks use in assessing the financial health of your small business.
This ratio measures your company’s ability to repay business debts by comparing your cash flow to the total annual business debt payments including your monthly SBA loan payments.
What’s the goal?
A Business debt coverage ratio greater than one means your business has enough income to pay off its debts. If you fall below this threshold, it indicates to banks that you won’t be able to repay an SBA loan.
How do you improve this ratio?
There are two ways businesses can improve this important ratio – by increasing cash flow or by decreasing debt. The SmartBiz Loans Small Business Blog has resources to help you reach these goals. Visit the following posts for additional in depth information:
Increasing Cash Flow
Not sure if you qualify for an SBA loan? Try the new SmartBiz Advisor™ online, educational tool to learn about how you can get your business SBA or bank loan ready before you apply – no cost involved. You can assess key criteria banks consider and where your business stands on each. Learn more about SmartBiz Advisor here.
* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.
**Banks can use slightly different approaches when calculating business debt coverage in terms of what expenses they include or how they define cash flow or debt.