There are many criteria that banks require in approving loans for businesses.  What usually comes to mind first is credit; given today’s financial crisis.  While credit is extremely important, there are many other factors in addition to credit scores that business must be aware of and account for when seeking capital for business growth.  The following outlines a company’s ability to repay or service a new debt facility. Banks and other financial lenders will not just give you money because you think you need it, you have to be able to pay for it as well.

You must be able to repay your new debt – both the principle amount and the interest.  Now, there are many structures to business debt like interest only (which I do not recommend), balloon payments, quarterly payments, etc.  Still, you have to generate enough income from the business to service the payment amount.  Further, not only do you have to generate enough money to pay the P & I, but you usually have to have a little bit more – usually 25% to 50%.

Why?  This additional ‘cushion’ provides the bank with assurance that your business could have a down period and still cover their payment.

Now to the numbers: To determine if your business could service a $100,000 business loan, begin with your net income.  To this amount, add back depreciation (this is a non-cash accounting anomaly) and any and all interest payments that you already make and your taxes.  This should be the net amount that your business has to cover your total debt service – this is essentially your earnings before interest, taxes, depreciation and amortization (EBITDA) or your actual cash profits from your operations.

For the remainder of this analysis, we will ignore taxes.  The interest on your loan is an operating cost – meaning it reduces your taxable income.  However, the principle portion that you pay comes straight out of your net income – after all other obligations are paid including local, state, and federal taxes.  The reason we will ignore taxes is to make this analysis simple and demonstrate why banks and other financial lenders require higher debt service ratios.

At 8% for 48 monthly payments, a $100,000 loan would require a monthly service of $2,442 or $29,296 per year (straight amortization for simplicity purposes).  Assuming that your business does not have any other debt, you would have to, at the least, earn this amount over and above all other business costs – over your EBITDA.  However, most banks want to see a debt service ratio of 1:1.25x to 1:1.5x – meaning that you need to generate EBITDA between $3,053 and $3,663 per month in this case.

Should your business have other debt that is not being paid off with this new facility, add that amount to your debt service minimum payment above.   You will then have to cover up to 1:1.5x all your debt obligations.

Further, banks do ‘what if’ analysis on this debt service requirement.  Take your operating profit (EBITDA) and reduce it by 10% and 20%.  After these calculations, does this new income amount still cover the original payment amount of $2,442?  If not, no loan.  Again, banks want to ensure that your business could survive a down turn and still make its payment obligation to them.

Keep in mind that the above analysis is based on past financial (past results of your business).  While the lender will make every attempt to forecast future projections, it does not significantly rely on expectations of what your business will or may do.

While this is a very basic analysis, I hope you get the gist of what banks look for when underwriting loans.  Should your business not be able to meet this requirement, then negotiate a lower payment through interest reduction, loan amount reduction, or balloon payments or reevaluate your need for a loan.  If you can’t pay for it, you don’t need it.

Additionally, there may be many other ways to finance your growing business.  The most widely used for working capital loans and advances are accounts receivable financing (factoring), purchase order financing, and business cash advances. These types of facilities can help bridge the gap between cash outlay and revenue. For more information on these types of business financing and to find lenders in your area that provide these services, please search for Business Money Today (.com) in your favorite internet browser.

If you have lived in your home for a number of years, then you have had time to have built up some equity in your home. By making regular payments on your mortgage, and having an increase in the value of your home over those years, the equity increases – especially if you have kept the house in good working order and appearance. Through a home equity line of credit you can get access to your equity and use it to fulfill some of your dreams. Here is how you can go about it.

Although there is more than one way to get access to your equity, a home equity line of credit, often referred to as a HELOC, may be your best option. One reason is that you have access to the money in equity, but you do not pay interest on it until you actually draw it out and use it. Initially, when you apply, you are given a credit limit that sets the amount of cash you can get. You are then given access to the money through a credit card or checking account.

A time limit is also set in which you can draw the cash out of the account. This means that you can only use the cash in your home equity line of credit for a limited time – which could be up to 11 years.

The interest that you are paying during the draw period is calculated on a daily basis (usually). The overall time length including both the draw period and the payment period are usually calculated on a 30-year time frame. As you draw money out, you are only paying the interest on the amount used.

A HELOC can work best for you if you have a number of projects that you have the money for, but do not know exactly how much you will need. You can use the money to take that vacation or cruise you have always wanted – to Bermuda, Alaska, Europe, or wherever, to make renovations or additions to your home, to pay for college, buy a car, debt consolidation, or to cover some medical expenses – you decide.

You do need to know about how repayment will take place. Some lenders will require a single balloon payment to be made for the whole amount at the end of the draw period. This will mean that you need to refinance it. Others will simply figure out how much cash you used and then calculate your payments for the payment period – which, in most cases, will fully amortize the home equity line of credit mortgage.

HELOC’s often have no closing costs. You do, however, need to find out about the margin that is a percentage of interest above the APR. It is permanent and could double your interest on the loan. Shop around for the best deals and compare the fees, interest rates, time for repayment, and other features. Then – enjoy your equity, and your dreams.

If you are feeling the pinch of not having enough money each month, you might be able to reduce your monthly mortgage payment by refinancing. It could reduce your payment and allow you to enjoy greater financial liberty – once again.

If you have an adjustable rate mortgage, and you find your rates going up – or you are waiting for them to do so, you can also benefit by refinancing and getting a more stable mortgage. Here are some of the details.

Adjustable rate mortgages, not long ago, were one way that people could get a larger house because the payments started out low. They stayed low for a while, and everyone who had them hoped that their income would increase by the time the interest rate became adjustable. Well – it sounded good at the time. Many of you, however, know that it just did not happen for everyone. Many were left with ever increasing payments.

Refinancing this type of mortgage, or any type, could reduce your monthly payments simply by giving your better terms. You do have to wait, though, for the interest rates to drop, or grab a new deal before they get much higher. Getting a better deal means that you need to see the interest rates drop at least one full per cent less than what you have now.

Another way to reduce your monthly payment – even if the interest rates do not drop, is to stretch out the time for repayment. Longer terms are available, including 40 and 50- year mortgages. If you can avoid these mortgages, though, you should. By stretching out the time, you add interest to it – quite a bit of interest. While it will lower your payment each month, it does increase your overall indebtedness.

The type of loan you want to get would be a fixed rate mortgage. Typically these do have a higher monthly payment than an adjustable rate mortgage, but by adding time, this becomes your mortgage of choice. It has no future surprises. Your payments will always be the same, and your payments are fully amortizing.

It may also be possible that you had obtained your last mortgage with a less than excellent credit rating. This could have given you an increase in the interest rate you received. If that is the case, and your credit could stand some improvement, or has improved since that time, you could get a better interest rate just on that fact. Start out by getting a copy of your credit report and making sure that it is correct. An error here could put you back into a higher interest rate. Take some time to raise your credit score further and reduce some of your other indebtedness. Then apply for a much better deal.

You will need to get several mortgage refinance quotes in order to get the best deal. Compare them carefully by paying special attention to the fees, and the closing costs. To reduce the interest rate even more, you might want to consider buying points. Stay away, though, from any mortgage that includes a prepayment penalty.