When you apply for a cash credit, overdraft or term loan, the credit team reads your financials through a handful of ratios. Knowing them in advance lets you fix issues before the file goes in. Each bank has its own norms; the levels below are common reference points, not rules.
1. Current ratio
Current assets ÷ current liabilities. It shows whether short-term assets cover short-term obligations. Many lenders look for about 1.33 or more for working-capital limits (the level implied by the second method of lending); some accept lower. Improve it by converting short-term debt used for long-term assets into term debt, and by bringing in long-term funds.
2. DSCR (debt service coverage ratio)
(Profit after tax + depreciation + interest on term debt) ÷ (term loan instalments + interest). It tells the lender whether cash earnings cover loan repayments. A DSCR comfortably above 1.2–1.5 over the loan period is usually expected.
3. TOL/TNW
Total outside liabilities ÷ tangible net worth. It measures how much of the business is funded by others. Very high values signal over-borrowing. Unsecured loans from promoters can sometimes be treated as quasi-equity if subordinated — ask your bank.
4. Debtor days
Receivables ÷ sales × 365. Old debtors reduce drawing power because banks usually exclude receivables beyond a cut-off (often 90 days). Clean up or provide for very old balances.
5. Interest coverage
EBITDA ÷ interest. It shows how easily operating profit covers interest.
Before you apply
- Reconcile your books with the GST returns and ITR so turnover numbers agree.
- Clear or explain old debtors and creditors.
- Prepare projections that tie to your history.
- Run the numbers — our DSCR and current-ratio calculators help, and Bebaak Capital produces a readiness report from your trial balance.
