The Financial Ratios Lenders Look At, in Plain Language
Understand the handful of ratios that banks use to decide whether to lend, and how to improve them before you apply.
When a lender reviews your accounts, they are not reading every line. They are checking a small set of ratios that summarise your financial health. Knowing them lets you improve your position before you apply.
Liquidity: can you pay your short-term bills?
The current ratio is current assets divided by current liabilities. A result below 1 means you owe more in the next twelve months than you hold in cash, stock and receivables. Many lenders like to see 1.2 or higher, though it depends on the sector.
Leverage: how much do you already owe?
The debt-to-equity ratio compares borrowings with the owners' investment. A very high figure tells the lender that the business is already carrying a lot of debt compared with what the owners have put in.
Coverage: can profits service the loan?
The debt service coverage ratio divides your operating cash flow by your total loan repayments (principal and interest). A figure of 1.25 or more is a common comfort level. It shows that cash flow is enough with some room to spare.
Efficiency: how quickly does cash come back?
Debtor days (how long customers take to pay), creditor days and stock days show how well you manage working capital. Long debtor days with short creditor days is a typical cause of cash strain.
Profitability
Gross margin and net margin show whether pricing and costs are under control. Falling margins, even with rising sales, are a warning sign.
How to improve them
- Collect receivables faster and offer a small discount for early payment
- Reduce slow-moving stock
- Keep properly prepared management accounts every month
- Separate business and personal spending
Reliable books are the foundation. If yours need attention, our financial advisory team can help you get lender-ready.