Yes, provided you can satisfy their requirements and provide the information they need.Their requirements are best understood by remembering that banks are private businesses that exist only if they make a profit. The majority of their profits comes from loan activity. When banks do not make loans that are sound, their profitability suffers and they get into trouble with bank regulatory agencies. Unsound loans are those to businesses with poor liquidity, poor cash flow, insufficient collateral, excessive debt and poor management.
Businesses with only one or two of these problems may still be able to borrow if they are exceptionally strong in the other areas. For example, a business with excessive debt may be able to borrow if it has exceptional cash flow or exceptional liquidity. Cash flow is the quantity of money flowing into the business in excess of the amount flowing out. Liquidity is the amount of assets it has that can easily be converted into cash.
Banks use a cash flow ratio to measure the adequacy of cash flow to service debt. If you divide the earnings before interest and taxes by the interest paid on the loan, you will get this ratio. While an acceptable ratio varies with industry and business, it is seldom less than 1.2 to 1. A business with a consistent and dependable cash flow would quality with this low ratio of $1.20 of earnings before interest and taxes for every $1.00 of interest expense. For most businesses, this ratio would be much higher.
Liquidity is usually measured by what is called a current ratio. This is the relationship between all current assets and all current liabilities. A ratio of 2 to 1 means that there are $2 of assets for every $1 of liabilities. Banks will disagree on what is a satisfactory current ratio and different businesses will produce different satisfactory current ratios. As is perhaps obvious, not only is the ratio itself important, but the type and quality of the assets and liabilities is significant to this measure.
If, for example, the assets are difficult to convert to cash and most of the liabilities are due within a short time, even a high current ratio might not be good enough. Conversely, highly liquid assets coupled with liabilities with long maturates might make a low current ratio acceptable.
Collateral and debt, two other important factors in determining the banks willingness to make a loan, are measured in ways you should understand.
Collateral is viewed by banks differently than it is viewed by you. They look upon collateral as worth less than do you. This “discounting” of your collateral occurs because they must view your collateral in terms of liquidation value in usually distressed circumstances. From experience, they know that real estate will liquidate out at only 75% of value and equipment will bring only 50%. Accounts receivable might be worth from 35% to 80% of face value and inventory can range from 20% to 50% of cost value. In placing value on your collateral for loan purposes, you must think like the banker.
Debt is usually measured by the bank in relation to the equity of the business. If your debt AFTER the loan will be more than two to three times your equity, chances are you will fail on this measure. Sometimes, you might fail with a one-to-one ratio. For some businesses, having a dollar of debt for every dollar of equity is too much.
The final part of your business that will be closely scrutinized by the bank is your management skill. If they don’t think you can plan, organize and control your business, you won’t pass muster.