Debt service coverage ratio is a ratio commonly used by lenders to assess to the credit worthiness and financial health of a business. It gives a comfort to the lenders if the company generates sufficient cash to pay off its current portion of debt as and when due. Before putting any funds in a business, the lenders also need to be sure that their money would be safe and would indeed be repaid in time. Debt service coverage ratio serves the purpose.
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Profitability ratios indicate the company’s ability to generate revenues over and above the operating expenses of the company during an accounting period. Of all the profitability ratios, Net profit margin is the most closely followed ratio by the shareholders.
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The performance of the business can be evaluated by having an insight into its financials. To build up a strong credibility before its lenders, a business must strengthen its financial ratios. The financial ratios can be classified into four main categories, namely, liquidity ratios, profitability ratios, solvency ratios and activity ratios. Activity ratios are the financial tools that are used to evaluate the ability of the firm to convert its assets into cash or cash equivalents. One such important ratio is Receivables Turnover ratio.
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Your credit score is the mirror to your lenders in terms of your repayment habits and to some extent, your reliance on debts. Thus, it is important for you to have a good credit score. Reviewing your credit report indeed helps you understand your credit health but understanding what is impacting your credit score is also important.
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Gearing Ratio evaluates the financial structure of the company. It indicates the ratio of capital raised through debt to that raised through equity. In other words, it is the measure of financial leverage of a company. It is also known as Debt-Equity Ratio.
It can be computed by dividing the company’s total debt (both long-term as well as short term obligations) with the shareholders’ equity. Thus,
Gearing Ratio/Debt-Equity Ratio = Total Debt/ Total Equity
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Once you have decided to apply for a small business loan, it helps to have an understanding both of your circumstances as well as the business loan lender’s perspective. This will help to improve the odds of success, and apply for a loan type and amount that is suitable to both your needs and your capacity.
Here are 5 important questions you should ask and answer before you apply for an unsecured business loan:
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Fintech firms have been generating a lot of interest among investors and borrowers. One aspect that perhaps has not received due attention is that of career prospects, especially relative to banking.
Fintech, as the term suggests, is a combination of technology and finance. This combination serves three purposes: a) it reduces cost of providing a service; and b) it widens the reach of the said service and c) provides a better customer experience. The primary categories of professionals a Fintech firm would attract are Information Technology, Risk, Finance, and due to high growth rates and customer orientation, Sales. There are compelling reasons for candidates from these fields to choose Fintech over Banks or NBFCs. Let us look at a few of these.
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Banks & Financial Institutions consider various factors to assess your credit worthiness whenever you apply for a loan. Fixed Obligations to Interest Ratio (FOIR) is one of the most important elements of the credit appraisal process of any business or individual. This ratio helps in determining their loan eligibility by comparing the Current Fixed Obligations of the applicant to his/her Net Monthly Income.
The Current Fixed Obligations include all the fixed monthly obligations of the customer but exclude the statutory deductions such as monthly Provident Fund contributions, Insurance Premiums, Professional Tax, Charity, Recurring Deposits, etc., which in turn help in determining his/her maximum monthly repayment capacity.
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Every business has its own core activities which are referred to as the Operating Activities.
Operating Income or Operating Profit refers to the profit that a business has after paying for all its Operating Expenses that include raw material costs, employee costs and all other operating bills. It is the amount available to cover the Interest & Tax obligations of the business. The Operating Profit when divided by the Revenue from Operating Activities gives us Operating Margin or Operating Profit Margin. It is a type of Profitability Ratio which implies how much a company earns as profit for every rupee of its sales.
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As a good financial management principle, it is always advisable to have an optimum mix of debt and equity to maximize your return on the capital invested into the business. Equity is the amount of capital invested by the owners of the business while debt consists of the business loans, mortgage loans availed from banks and financial institutions.
When one takes loans from banks, it has to service the debt by the regular principal and interest payments. So, indeed it makes sense to know how better placed you are in terms of servicing your debt obligations, especially the interest part.
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