A business may extend credit to its customers for the goods sold & services rendered to them and frame appropriate credit policy suitable to the business. Credit policy indicates the credit period that a company will offer to its customers. A credit policy should not be too liberal that it results in defaults, nor should it be too strict that it restricts sales. Ageing analysis of accounts receivables helps a business in framing an appropriate credit policy and also helps to analyze the category and quality of its debtors.
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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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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 invests in several assets to earn income. These may include fixed assets which include immovable property and machinery or current assets which include inventory and other working capital requirements.
Asset Turnover Ratio determines how effectively a business is deploying its assets to generate revenue. In financial terms, Asset Turnover ratio is defined as the ratio of Net Revenue of the company to its Total assets (which comprises of both Fixed as well as Current assets).
Thus, Asset Turnover Ratio = Net Sales / Total Assets
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Finance is quite rightly called the ‘Lifeblood of Business’. Short-term or long-term; managing working capital or capital finance; completing an order or strategic business expansion…. nothing works without business finance. When this criticality is seen alongside the poor state of SME financing, it is no surprise that the SME economic growth engine is often found sputtering.
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Window shopping is taken very seriously by some shoppers when they visit markets or malls. This isn’t surprising when it comes without any costs attached. Not so much when you are in the market for a loan for your small business. Each window you stop at ends up making you and your small business a little less credit worthy.
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Despite their importance to the Indian economy, MSMEs suffer institutional neglect with access to financing at a reasonable cost being one of the key pain points for small businesses. However, a combination of realisation of the importance of this segment, improved risk appetite, and innovations in the channels linking borrowers with lenders is slowly but surely changing things for the better.
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