You want a bank loan.
You need to know what banks look for.
You need to understand criteria.
You need actionable metrics.
Bank loan criteria. Lender evaluation. Actionable metrics. Your preparation.
This guide shows you how.
Criteria translation. Metric mapping. Calculator outputs. Your readiness.
Read this. Understand criteria. Prepare metrics.
Key Takeaways
- Liquidity is critical—banks want current ratio above 1.5 and positive working capital
- Payment capacity matters—DSCR above 1.25 shows you can service debt, higher is better
- Leverage must be reasonable—debt-to-equity ratio should be appropriate for your industry
- Profitability shows sustainability—positive and improving profit margins are essential
- Cash flow must be predictable—forecasted positive cash flow demonstrates ability to repay
Table of Contents
Why Criteria Matter
Criteria determine approval.
What happens without meeting criteria:
- Loan applications are rejected
- Time is wasted
- Opportunities are lost
- Business growth is constrained
What happens with meeting criteria:
- Loan applications are approved
- Time is used efficiently
- Opportunities are captured
- Business growth is enabled
The reality: Criteria enable funding.
Liquidity Criteria
Understand liquidity requirements:
Current Ratio Requirements
What banks want:
- Current ratio above 1.5
- Preferably 2.0 or higher
- Stable or improving trend
- Industry-appropriate levels
Calculate it:
- Use our Current Ratio Calculator
- See where you stand
- Identify improvement needs
Why it matters: Current ratio shows short-term stability.
Working Capital Requirements
What banks want:
- Positive working capital
- Adequate cash cushion
- Stable or improving trend
- Sufficient for operations
Calculate it:
- Use our Working Capital Calculator
- See your position
- Identify improvement needs
Why it matters: Working capital shows operational cash.
Pro tip: Understand liquidity criteria. Current ratio, working capital. Use our calculators to assess. See our financial foundation checklist for comprehensive preparation.
Payment Capacity Criteria
Understand payment capacity requirements:
DSCR Requirements
What banks want:
- DSCR above 1.25 minimum
- Preferably 1.5 or higher
- Stable or improving trend
- Consistent payment ability
Calculate it:
- Use our Debt Service Coverage Ratio Calculator
- See your payment capacity
- Identify improvement needs
Why it matters: DSCR shows ability to service debt.
Interest Coverage
What banks want:
- Ability to cover interest payments
- Comfortable coverage margin
- Stable operations
- Predictable income
Why it matters: Interest coverage shows payment ability.
Pro tip: Understand payment capacity. DSCR, interest coverage. Use our DSCR Calculator to assess.
Leverage Criteria
Understand leverage requirements:
Debt-to-Equity Requirements
What banks want:
- Reasonable debt-to-equity for industry
- Not excessive leverage
- Stable or improving trend
- Manageable debt burden
Calculate it:
- Use our Debt-to-Equity Ratio Calculator
- See your leverage position
- Compare to industry standards
Why it matters: Debt-to-equity shows financial risk.
Total Debt Service
What banks want:
- Manageable total debt service
- Reasonable debt burden
- Ability to service all debt
- Room for additional debt
Why it matters: Total debt service shows capacity.
Pro tip: Understand leverage criteria. Debt-to-equity, total debt service. Use our Debt-to-Equity Ratio Calculator to assess.
Profitability Criteria
Understand profitability requirements:
Profit Margin Requirements
What banks want:
- Positive profit margins
- Improving trends preferred
- Industry-appropriate margins
- Sustainable profitability
Calculate it:
- Use our Profit Margin Calculator
- See your profitability
- Identify improvement needs
Why it matters: Profit margins show sustainability.
Profitability Trends
What banks want:
- Improving margins over time
- Consistent profitability
- Positive trajectory
- Stable operations
Why it matters: Trends show sustainability.
Pro tip: Understand profitability criteria. Profit margins, profitability trends. Use our Profit Margin Calculator to assess.
Cash Flow Criteria
Understand cash flow requirements:
Cash Flow Forecast Requirements
What banks want:
- Positive projected cash flow
- Predictable cash patterns
- Adequate for debt service
- Realistic projections
Calculate it:
- Use our Cash Flow Forecast Calculator
- Project future cash positions
- Show repayment ability
Why it matters: Cash flow shows repayment ability.
Cash Runway Requirements
What banks want:
- Adequate cash runway
- Sufficient reserves
- Ability to weather downturns
- Strong cash position
Calculate it:
- Use our Cash Runway Calculator
- See time available
- Show financial stability
Why it matters: Cash runway shows stability.
Pro tip: Understand cash flow criteria. Forecast, runway. Use our calculators to assess. See our cash flow safety net guide for planning.
Your Next Steps
Understand criteria. Calculate metrics. Prepare for loan.
This Week:
- Review this guide
- Understand all bank criteria
- Calculate your current metrics
- Identify gaps
This Month:
- Work on improving weak metrics
- Strengthen financial foundation
- Prepare loan application
- Document all metrics
Going Forward:
- Monitor metrics regularly
- Maintain strong foundation
- Stay loan-ready
- Build relationships with lenders
Need help? Check out our Current Ratio Calculator for liquidity, our Working Capital Calculator for cash position, our Debt Service Coverage Ratio Calculator for payment capacity, our Debt-to-Equity Ratio Calculator for leverage, our Profit Margin Calculator for profitability, our Cash Flow Forecast Calculator for cash flow, and our financial foundation checklist for comprehensive preparation.
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FAQs - Frequently Asked Questions About How Banks Really Look at Your Business: Translating Their Criteria into Actionab
What current ratio do banks want to see before approving a business loan?
Banks typically want a current ratio above 1.5, with 2.0 or higher being preferred, along with a stable or improving trend.
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The current ratio measures your short-term liquidity by dividing current assets by current liabilities. A ratio above 1.5 signals that you can cover your near-term obligations.
Banks also look for stability or improvement over time, not just a single snapshot, and they compare your ratio to industry-appropriate levels.
Positive working capital, meaning you have more current assets than current liabilities, is closely related and shows you have an adequate cash cushion for operations.
What is DSCR and why is it critical for bank loan approval?
DSCR (Debt Service Coverage Ratio) measures your ability to service debt. Banks want it above 1.25, with 1.5 or higher preferred.
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DSCR is calculated by dividing your net operating income by your total debt service payments, showing whether your business generates enough income to make loan payments.
A DSCR of 1.25 means you earn 25% more than needed to cover debt. Banks see this as the minimum safety margin, while 1.5 or above signals comfortable payment capacity.
Interest coverage is also evaluated alongside DSCR. Banks want to see that you can consistently cover interest payments with a comfortable margin and predictable income.
How do banks evaluate a business's leverage and debt-to-equity ratio?
Banks want a reasonable debt-to-equity ratio appropriate for your industry, with manageable total debt and room for additional borrowing.
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The debt-to-equity ratio shows your financial risk level by comparing how much you owe to how much you own. Excessive leverage signals higher risk to lenders.
Banks compare your ratio against industry standards since different sectors carry different typical levels of debt, and they look for a stable or improving trend.
They also assess your total debt service burden to ensure you have manageable overall debt obligations and capacity to take on the additional debt you are requesting.
What profitability metrics do banks look for in a loan application?
Banks want to see positive profit margins, improving trends over time, industry-appropriate margins, and evidence of sustainable profitability.
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Positive profit margins demonstrate that your business is fundamentally viable and can generate enough revenue to cover costs and service debt.
Banks pay close attention to profitability trends. Improving margins over time show that your business is becoming more efficient and sustainable, not just profitable in a single period.
They also compare your margins to industry benchmarks to assess whether your profitability is competitive and sustainable within your specific market.
Why do banks focus so heavily on cash flow forecasts when evaluating loan applications?
Cash flow forecasts directly show your ability to repay the loan. Banks need to see positive projected cash flow with predictable patterns adequate for debt service.
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Banks want realistic projections showing positive cash flow that can support both your business operations and the proposed loan payments.
Predictable cash patterns matter more than occasional spikes. Consistent, reliable cash generation gives lenders confidence in your repayment ability.
Cash runway is also evaluated to ensure you have adequate reserves and can weather downturns without defaulting on your obligations.
How should I prepare my financial metrics before approaching a bank for a loan?
Calculate your current ratio, working capital, DSCR, debt-to-equity ratio, profit margins, and cash flow forecast, then identify and address any weak areas.
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Start by running each metric through the appropriate calculator to get a baseline: current ratio and working capital for liquidity, DSCR for payment capacity, debt-to-equity for leverage, profit margin for profitability, and cash flow forecast for repayment ability.
Compare your results against the bank thresholds: current ratio above 1.5, DSCR above 1.25, reasonable debt-to-equity for your industry, positive margins, and positive projected cash flow.
Work on improving any weak metrics before applying, document all your numbers clearly, and maintain strong financial records. This preparation significantly increases your approval chances.
Sources & Additional Information
This guide provides general information about bank loan criteria. Your specific situation may require different considerations.
For current ratio calculation, see our Current Ratio Calculator.
For working capital calculation, see our Working Capital Calculator.
For DSCR calculation, see our Debt Service Coverage Ratio Calculator.
For debt-to-equity calculation, see our Debt-to-Equity Ratio Calculator.
For profit margin calculation, see our Profit Margin Calculator.
For cash flow forecasting, see our Cash Flow Forecast Calculator.
Consult with professionals for advice specific to your situation.
