A commercial lender is answering two questions: can this business repay, and does management know what is happening inside it? The financial package you send answers both — whether you intend it to or not.
What goes in the package
Most lenders will request some version of:
- Three years of year-end financial statements (income statement, balance sheet, cash flow statement)
- Current-year interim statements, usually within 60 days of month-end
- Three years of business tax returns
- Accounts receivable and accounts payable aging reports
- A debt schedule listing every obligation, rate, payment, and maturity
- Twelve-month projections with assumptions
- Personal financial statements and tax returns for owners guaranteeing the loan
Missing or late items signal weak controls before anyone reads a number.
The ratios they compute
Debt service coverage ratio (DSCR)
Cash available for debt service divided by total debt service. The numerator is usually earnings before interest, taxes, depreciation, and amortization (EBITDA), sometimes adjusted for owner distributions. The denominator is annual principal plus interest on all debt, including the proposed loan. Lenders typically require this above a set minimum — often in the range of 1.20 to 1.35 — confirm with your lender.
Leverage: total debt to EBITDA
How many years of earnings it would take to repay all debt. Higher is riskier. Acceptable levels vary widely by industry.
Current ratio
Current assets divided by current liabilities. Measures near-term liquidity. Below 1.0 draws questions.
Working capital
Current assets minus current liabilities, in dollars. Some lenders set a minimum as a covenant.
Tangible net worth
Equity minus intangible assets like goodwill. Lenders discount intangibles to zero.
What they read beyond the ratios
- Trend. Three years of statements exist to show direction. Declining margin with flat revenue is a harder story than rising margin with volatile revenue.
- Receivable quality. An aging report with 30% of balances over 90 days undercuts every other number.
- Concentration. One customer above 25% of revenue will be asked about.
- Owner draws. Distributions that swing with cash rather than with profit suggest the business is a personal account.
- Consistency. Interim statements that do not reconcile to the tax return, or financials that get restated, are the fastest route to a decline.
A worked example
A $9M distribution business applying for a $1.5M term loan to buy a competitor.
- EBITDA: $1,100,000
- Existing annual debt service: $280,000
- Proposed loan annual debt service: $340,000
- DSCR = $1,100,000 ÷ ($280,000 + $340,000) = 1.77
Comfortable. But the receivable aging showed $610,000 over 90 days, most from one customer. The lender's underwriter reduced eligible EBITDA for the doubtful collection and questioned the concentration. The loan was approved only after the business demonstrated a collections plan and provided a customer contract.
The ratio passed. The quality of the underlying asset almost failed it.
Preparing the projections
Lenders discount optimistic projections to zero and reward defensible ones.
- Tie the first projected month to the last actual month
- State every major assumption in one line each: revenue growth, gross margin, headcount, capital spending
- Show the proposed debt service in the projection and the resulting DSCR by year
- Include a downside case: what happens to coverage if revenue falls 15%
Covenants
Read them before signing. Common covenants:
- Minimum DSCR, tested quarterly or annually
- Maximum leverage
- Minimum working capital or tangible net worth
- Restrictions on distributions, additional debt, or asset sales
- Reporting deadlines for financials
Build covenant calculations into your monthly reporting so a breach is forecast months ahead, not discovered by the bank.
What to do this quarter
- Compute your DSCR, leverage, and current ratio today using the last twelve months. Know your numbers before the lender does.
- Clean the receivable aging. Collect, write off, or document every balance over 90 days.
- Assemble the package list above into a single folder and keep it current. A ready package shortens the process by weeks.
- If you have existing debt, add covenant tests to your monthly close.