#LoanTipSixty: Debt Service Coverage Ratio
July 30, 2021
Are you familiar with FE’s #LoanTipSixty Video Series, where experts from FE share financing insights in just 60 seconds? Read below for the key takeaways from our #LoanTipSixty: The Debt Service Coverage Ratio video or watch the video here. Follow the series on FE’s YouTube Channel.
What Is the Debt Service Coverage Ratio?
You may have heard the term debt service coverage ratio before. Wondering what it means and how to determine what you want your ratio to be to get a small business loan? Read on for a simple explanation from Senior Business Advisor, Eddie Landeros.
The debt service coverage ratio is a number lenders analyze when considering approving a business owner for a loan. In simple terms, it compares your expenses against your revenue. For example, if you are receiving $5,000 in revenue a month, and you have $5,000 in expenses, that is a 1:1 ratio.
What Ratio Do Banks Require?
Banks usually require a 1:1.25 ratio. For example, if you are making $5,000 in revenue, you can only have up to $4,000 in expenses – which includes all your payments. The payments they consider expenses are the total of all expenses which can include a home mortgage, student loan and your business loans. The 1:1.25 ratio requirement can be limiting for small business owners trying to get a loan. Your cash flow may not support the extra $1,000 needed by a bank.
What Ratio Do Alternative Lenders Require?
Alternative lenders like FE Small Business Finance are a lot more flexible and will accept a 1:1 ratio. The difference in the ratio gives the small business owner more leeway when measuring revenue against expenses.
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We’re Here to Help
Here at FE Small Business Finance, we work alongside our borrowers and support them far beyond just getting financing. Our team of loan experts will help guide you through the loan process and help you with everything from understanding the debt service coverage ratio to what documents you need to how to expedite the process. Don’t be shy! We’re here to help.
FE Small Business Finance offers several loan options for business owners who want to grow their operations and are planning for their long-term needs. Tell our loan experts about your business, and they’ll work to match you with a financing plan that best suits you. Let’s talk! Reach us at email@example.com or (619) 243-8667.
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