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It is important for business owners seeking commercial credit to know what cash flow ratios the lenders review. Quite honestly, it is important for business owners to know what cash flow is necessary for their business to stay healthy. So here is the quick explanation of what lenders are looking for.

There are two things lenders look at for cash flow when they review a commercial loan request. The first is the business cash flow. This can be defined as EBITDA (Earnings Before Interest Tax Depreciation and Amortization). This will tell a banker what kind of cash you have available to make debt payments on the business loan. The EBITDA divided by the total debt payments needs to be 1.20 or better.

Some lenders will also calculate an NDI (Net Discretionary Income) figure for the key owners of the business. This figure tells the bank how much cash the owners have left after they pay all their personal debts and living expenses. Lenders will add this left over income to the business cash flow to see the global cash flow for the business. (Not all lenders will do this. Some will only give you credit for the business cash flow and ignore the NDI all together.)

The tax returns are used to calculate these ratios and are given the greatest weight in determining true cash flow. Operating statements will be given weight but are typically second to the tax returns. It has been said that cash flow is the life blood to any business. Keep a sharp eye on it and you should be business credit worthy.

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