Need Business Financing? Here’s Four Numbers You Should Know.

March 22, 2018 | Mike Slater

Mike Slater, President, VITAL Financial Services

In its 2017 Mid-Year Economic Report, the National Small Business Association reported that nearly 30% of small businesses couldn’t get access to adequate financing. If you’re a business owner or in a leadership role, it goes without saying that access to capital is critical to surviving and thriving in the ebbs and flows of the business cycle—particularly if you’re focused on generating more flows than ebbs!

Are you worried you could find yourself among the 30%? If you anticipate the need for financing in the next year, there are numbers you’ll need to understand beyond interest rates and loan terms.

Just as you’ll evaluate the bank, the bank will evaluate your company to determine credit-worthiness. This is an assessment of how likely it is your company will repay its loan. Now is the time to start thinking like a banker and consider how your company will look when it’s in the financial spotlight.

Here are four key numbers to pay attention to:

  1. Fixed-Charge Coverage Ratio. This is a formula used by lenders to analyze the cash flow available to meet your company’s fixed expenses. It’s calculated by adding earnings before interest and taxes (EBIT) plus fixed charges, and then dividing that by fixed charges and interest. This helps determine your company’s ability to take on debt. If your company has a low ratio, that’s a red flag to lenders that a decrease in earnings could impair your ability to repay a loan.
  2. Liquidity. This is the degree to which your company has cash available to cover its obligations, or assets that can be quickly converted to cash to cover obligations. As the saying goes, “cash is king.”
  3. Cash flow leverage. This is also referred to as the “cash flow-to-funded debt” ratio. It looks at how much available cash your business has relative to outstanding debt. The bank looks at cash flow, rather than profit, because it provides a better picture of your ability to repay debt. If your funded debt is greater than four times your cash flow, you may have difficulty accessing additional credit.
  4. Debt-to-tangible net worth. Your tangible net worth is the value of your company’s assets, not including value derived from intangibles like patents, copyrights, intellectual property, loans to shareholders and loan costs. It gives lenders a sense of how much protection they’ll have if your business defaults on the loan. Conventional loan standards at most banks say you can have approximately three dollars of debt for every dollar of equity. If you have more debt, it doesn’t mean you can’t access credit, but you may need a credit enhancement such as an SBA (Small Business Administration) guarantee.

Most business owners possess talent and skill in a particular field, and managing the financial complexities is outside of their comfort zone. Growing in your understanding of the four measures above will provide an important foundation of financial acumen with benefits that extend far beyond your next loan application.

Mike Slater is president of VITAL Financial Services. VITAL provides financing to small- and mid-size commercial and industrial businesses, and specializes in loans guaranteed through the Small Business Administration and the U.S. Department of Agriculture's Business & Industry program. These programs encourage lenders to extend credit to companies that don't fit the normal credit profile. VITAL has provided more than $300 million in financing to small- and mid-size businesses that have experienced challenges in traditional credit markets. Learn more at