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- Applying for an SBA Loan? Know Your Combined Debt Coverage
March 13, 2018
By
Suzanne Robertson
Many entrepreneurs applying for an SBA loan don’t know how banks evaluate the financial health of their business.
SmartBiz Loans set out to solve that problem and we’re empowering business owners through a new (and free!) online tool,
SmartBiz Advisor.
Created specifically for small business owner,
SmartBiz Advisor acts as an
Intelligent CFO™ for your business. Just like a CFO in a large business, SmartBiz Advisor can help you learn how to build your business lending profile by educating you about
7 key financial areas banks review when making lending decisions. After all, SmartBiz Loans knows that your business is more than just a credit score.
One of the important financial ratios that banks review before granting an SBA loan is your
Combined Debt Coverage. Read on to learn more about this important ratio and how you can improve your scores if needed.
How to Calculate Combined Debt Coverage**
Combined Debt Coverage is calculated by dividing total annual business and personal cash flow by the total annual business and personal debts. Here’s what you need to know about these measurements of business and personal financial health.Business Cash Flow
How you manage business cash flow can be the difference between a business with staying power and one that tanks. According to Investopedia, cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing. Here’s a comprehensive article from NerdWallet that gives you step-by-step instructions to calculate your businesses cash flow: How to Calculate Business Cash FlowPersonal Cash Flow
In short, a positive net cash flow means that you earned more than you spent and that you have some money leftover from that period. On the other hand, a negative net cash flow shows that you spent more money than you brought in. Here’s a guide to help you calculate your personal cash flow: How to Create a Personal Cash Flow StatementBusiness Debts
Business debt, also referred to as commercial debt, is debt owed by a business and can be good or bad. Good debt has low rates, long terms and manageable payments. Bad debt, like credit cards or lines of credit, can have high rates, short terms and payments that cut into cash flow. The SmartBiz Small Business Blog has an article for business owners who need to lower debt: How to Reduce Bad Business Debt.Personal Debts
Personal debt is debt owed for which you personally are legally responsible. Credit cards, student loans, mortgages and car loans are all types of personal debt. Like business debt, personal debt can be good.What Should Your Combined Debt Coverage Goal Be?
If your goal is to acquire a low-cost SBA loan, pay attention to the ratios below. > 1.25 = Acceptable Borrower- This ratio indicates to lenders that you’re able to cover payments for all personal and business debt.
- A ratio of less than 1 indicates your business doesn’t have enough cash flow and suggests it is unlikely you could repay a loan.
