Most private businesses rely on small business loans to run their operations. This is mainly because of financial constraints and unpredictable market forces. Unfortunately, it is never easy to access loans from traditional lenders.
The COVID-19 pandemic has hit hard almost every sector, making financial institutions exercise caution when issuing loans. This is probably because of the high number of defaults that have been experienced during the pandemic.
As a small business owner, you should ensure that you try as much as possible to demonstrate your ability to repay loans. Besides, learn to compare different lenders in order to choose one that is easy to work with and offers friendly interest rates.
Here are 5 factors to consider when comparing business loans:
1. Cash assets
Cash assets are a primary measure of liquidity for small businesses. It is one of the main pointers that informs creditors about the likelihood of a company defaulting. In addition, cash assets offer a sign of how flexible a business is to access liquid accounts for it to make tangible investments.
According to Lantern by SoFi, companies should learn to compare business loans in order to assess their ability to repay and get better interest rates. In other words, having cash at hand gives a business the power to make quick decisions.
2. EBITDA assets (Earnings before interest, taxes, depreciation, and amortization)
EBITDA to assets is another important factor that helps boost the financial credibility of a company. Comparing the two indicators helps a business to know whether it is making profits or not. For example, you will be able to see how much working capital is available, how much the company is generating and the total assets owned.
3. Debt service coverage ratio
Debt service coverage is obtained by dividing a company’s current amount of long-term debt and interest expense. Lending companies usually have an acceptable minimum ratio – and this will be one of the preconditions for a loan.
The higher the ratio, the easier it will be for your loan application to be approved. As such, it is up to you to ensure that you always maintain a higher ratio to increase your chances of getting a loan.
4. Liabilities to assets
The liabilities to assets ratio offers a sense of the company’s capital structure in terms of equity cushion. If the ratio of liabilities to assets is greater, then the cushion will be considered to be smaller. This shows that in case things get rough ahead, the business can crush any time.
5. Net income to sales
Net income to sales is also referred to as net profit margin. It generally shows what remains after all expenses and costs are deducted from the company’s revenue. Just like all other metrics, the net income to sales ratio can differ from one industry to another. It’s generally used to provide insights into the performance of a company.
In a nutshell, there are several factors that business owners should consider when comparing business loans. This will help increase their chances of accessing credit from different lenders.