Small business owners can be so buried in their daily operations that they lose sight of key financial metrics. That’s where getting a loan becomes difficult. Banks are going to ask a lot questions before they extend any credit to you. Here are 3 essential indicators you need to know before seeking business lending:
1. Debt-to-equity Ratio:
This ratio is calculated by dividing your company’s total debt by its shareholder equity. At the end of the day, funders want you to demonstrate that you are serious about your business. You won't just walk away when bad things happen. So you (or/and your shareholders) use this indicator to show that you also have skin the game.
Earnings before interest, tax, depreciation and amortization (EBITDA) essentially measures your company’s net cash flow. It’s a way to reveal the actual outcome of your operating decisions without having to factor in non-operating decisions like financing, accounting or tax. It can be more relevant when investors try to get your valuation.
3. WORKING CAPITAL:
Working capital is a calculation of unrestricted current assets minus unrestricted current liabilities. It’s a measure of liquidity and tells if you have enough cash to smooth out bumps.
Basically, bankers want to know how many months of working capital your company has. For most Canadian businesses, you should have a 3–6 months runway.
Of course, there are many other financial ratios and indicators to consider when lenders review your application. Check more please visit our main web page: www.stonebanc.com
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