A good debt service coverage ratio.
This is the ratio of cash available for debt servicing to interest, principal and lease payments. The banker will calculate this by adding annual net income with amortization/depreciation, interest expense and other things and dividing that sum by the sum of the borrower's loan principal, interest payments and lease payments. “This is the key ratio that most bankers are going to look at,†he says. Dillon states that most banks will consider a debt service coverage ratio of 1.20:1, or 1.25:1 as very good.
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Core financial strength versus just operational strength.
Dillon cites loan applications from two restaurants, both of which looked good operationally. “One has probably a little bit stronger following, but good food at both restaurants. The other negotiated a tremendously favorable lease with a low rent rate, low annual escalations, in an excellent location with major tenant improvement allowances from the landlord. The second also did a great job with establishing the financial foundation.†As a result, while both have operational strength, the second also has a stronger, established financial foundation.
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A solid credit score.
There’s no getting around the fact that banks will look at the majority shareholder’s credit history. “It’s important to look at your credit score to know what it is and I’d say if it’s lower than probably 660 or 680, then, you need to start thinking about ways to improve it and try to get that up, I would say, before you walk into the bank, if at all possible,†says Dillon. “Now, that’s not to say that if you don’t have a 660 credit score that people won’t take a look, but it makes it a little bit harder. In some banking institutions, your personal credit score for small business is one of the key determinants of whether or not the bank is willing to lend, that’s not necessarily the case with us, but it is at least an indicator of ability and willingness to repay personal debt.
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