Applying for a loan? Read and prepare for the questions that the banks might ask you.
• How much money do you want to borrow?
You will need to state in your application the total amount you plan to loan. It can be in the form of a credit line for your working capital requirement, or in the form of debt financing for your capital expenditures.
• Is your business profitable enough, and does it have enough cash flow, to service the debt?
You must show to the bank that your business can generate enough cash flow to service the monthly debt amortization. A ratio of at least two times interest cover will be safe (this ratio is the net income before interest expense divided by the interest expense).
• Does your business have collateral to cover the loan? If not, do you have personal assets to guarantee the loan?
To support the loan, your business must have tangible assets such as real estate, inventory merchandise, or equipment. The maximum amount of loan that can be extended to you depends on the value of the collateral that you can pledge to the bank.
• Does your business have a reasonable balance between debt and equity?
The bank avoids granting loans to businesses with an over-leveraged financial position. They consider businesses with more debt than equity risky of defaulting on their loan payments. Consider a debt to equity ratio of one-to-one as the maximum; any ratio lower than that should be good.
Henry Ong, CMC, CMA, is president and COO of Business Sense, a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at email@example.com or post your Money Matters question here.
This article was originally published in the April 2007 issue of Entrepreneur Philippines.