The Ratios Lenders Really Look At — And Why You Should Too
Most small business owners feel blindsided when lenders ask for financial ratios — but these numbers aren’t just gatekeeping tools. They’re signals of operational health, cash flow resilience, and long-term viability. In this guide, we’ll break down the key ratios lenders use — and how you can use them to strengthen your business.
Debt Service Coverage Ratio (DSCR)
**Formula:** Net Operating Income ÷ Total Debt Payments
**Why Lenders Care:** It shows whether your business generates enough income to cover its debt obligations. A DSCR of 1.25+ is often required for SBA loans.
**Why You Should Care:** A DSCR below 1 means you’re operating at a deficit. Improving it gives you breathing room and leverage in negotiations.
Current Ratio
**Formula:** Current Assets ÷ Current Liabilities
**Why Lenders Care:** It measures your liquidity — your ability to pay short-term obligations. A ratio between 1.5 and 3.0 is considered healthy.
**Why You Should Care:** A low ratio signals cash flow stress. A high ratio might mean you’re not reinvesting idle assets.
Even if you are making significant income, if your accounts receivables are coming in much slower than your accounts payables need to go out, you could run out of cash flow. In finance, we call this “growing broke”.
Quick Ratio (Acid Test)
**Formula:** (Cash + Receivables + Marketable Securities) ÷ Current Liabilities
**Why Lenders Care:** It strips out inventory to test your true liquidity.
**Why You Should Care:** It’s your emergency buffer metric — helps you assess how fast you can respond to a downturn.
Debt-to-Equity Ratio
**Formula:** Total Liabilities ÷ Shareholders’ Equity
**Why Lenders Care:** It shows how leveraged your business is. High ratios = higher risk.
**Why You Should Care:** Helps you balance growth through debt vs. equity and affects your ability to raise capital.
How to Use These Ratios to Tell Your Story
These ratios aren’t just for lenders — they’re tools for you to track your own growth.
– Show trends over time (e.g. improving DSCR)
– Use them in your pitch deck or loan application
– Pair with context: “We improved our current ratio by streamlining receivables”
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