Bankers speak their own language and expect us to understand it! One ratio that is very important to them when considering approving a loan is the Debt Service Coverage Ratio - or DSCR . This ratio simple measures the net cash flow of the real estate or business against the annual interest and principal payments on the debt (Debt Service).
Bankers love cushions - no, not the ones they sit on - but a buffer of net or free cash flow over and above the debt service requirements. This ratio begins to be acceptable to banks at 1.20x. So if you have annual debt service requirements of $100,000, then your net cash flow must be at or above $120,000 ($120,000/100,000 = 1.20x).
Certain banker's will go below 1.20x, but be prepared to see that increased risk in the interest rate charged on your loan. Look at it this way, your interest's and the bank's are together in this, because you would also want an acceptable cushion or protection against a loan default - especially if you signed a personal gurantee!
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