Have you ever heard that it takes money to make money? I certainly have. Although frustrating, especially for someone thinking about starting or expanding a business, it is only partly true.
It’s common to borrow money when starting or expanding a business. Having the cash for a down payment is important, but what matters most is not how you came up with the money, but whether you have the cash flow to support the debt you’re asking for. Most lenders look for a debt coverage ratio of 1.20 or more as a minimum requirement. Sometimes referred to as a cash flow coverage ratio, it’s calculated by using the numbers from your tax returns to come up with your net income and dividing that by the total amount of annualized debt service payments you have. Said differently, we look to see that you have at least $1.20 coming in for every $1.00 going out. The larger the ratio, the better things look.
Some of this comes down to the quality of your advisors. From a banker’s point of view, you should never measure the worth of an accountant based on how little they can get you to pay in taxes. The true measure of value is someone who will discuss your future business needs and custom-tailor a plan regarding how much income you need to show on your taxes to help support your future debt needs if any. It may mean paying a little more in taxes, but it may also be the difference between qualifying for that loan your business needs or having to put off plans to start or expand the business for a few more years.