While each bank may place slightly different emphases on information provided by borrowers and how they lend, there are several key ratios that are a universal focus with all lenders.
If a borrower loan doesn’t meet these requirements, it becomes very difficult to overcome due to the regulatory oversight placed on banks.
While not exhaustive, the following three key ratios can quickly put your organization in the category of “Bankable” verses “Not” so understanding them and how they are calculated can help you influence your long-term credit strength.
No. 1 – Debt-Service Coverage Ratio (“DSCR”)
This ratio measures the cash flow available for a borrower to service debt payments. Remember, a borrower’s ability to make payments is paramount. Typically banks consider a good DSCR for a nonprofit as anything that is >= 1.20. Here is how you calculate your DSCR:
- Take your net operating income and add back the following items; any non-cash expenses (depreciation, amortization, etc.), any expenses on the P&L that would be replaced by the new loan expenses (rent, current interest costs, etc.), as well as any truly discretionary expenses that are not ongoing.
- This becomes your Adjusted NOI.Determine the total debt service cost for the new loan by estimating the monthly payment of the loan and multiplying it by the number of months represented in your Adjusted NOI.
- This becomes the Total Debt Service.
- Then, divide this adjusted NOI by total debt service to get your DSCR (Adjusted NOI / Total Debt Service).
No. 2 – Debt to Income (“DTI”)
This ratio is a quick measurement to compare the amount of debt you are requesting to the total revenue earned by the borrower. The DTI is a quick ratio that is easy to calculate. Banks ideally don’t want the total loan requested to be greater than 3 to 3.5 times revenue.
As an example, if a borrower is looking for a $1,000,000 loan and earned $250,000 in revenue last year, the DTI would be 4.0 – this is not a good ratio. (Total Loan Amount / Total Revenue)
No. 3 – Loan to Value (“LTV”)
This ratio is much more familiar to the average person. It is focused on comparing the value of the real estate that is securing the loan to the loan size. While banks are most concern about the borrower’s ability to make payments, they also want to protect themselves.
In the event a loan doesn’t perform; the lender would be the recipient of any proceeds from the sale of the real estate. Establishing a maximum LTV ratio allowable at the point of making a loan is designed to limit any potential losses lenders might experience.
For nonprofit loans and due to the fact that there are no loan guarantors, banks typically require a LTV of no more than 70 percent. (Total Loan Amount / Property Value)
Now more than ever, having a trusted advisor that can help counsel nonprofits on its options as well as assist in gathering the necessary information and succinctly communicating with lenders to best position the organization is vital.
Semble has proven to be that trusted advisor for many nonprofits. We are an expert financial services provider focused on helping secure necessary loan funds at the lowest possible cost.
To learn more about the services we provide, please give us a call to talk to one of our representatives 877-973-6253. Also, to see the financial impact Semble can have, try out our free online loan calculate by clicking here.
Todd Tarbert Semble
Todd Tarbert is CEO of Semble, a trusted non-profit advisor. To learn more about its services, you can call a representative at 877-973-6253. To see the financial impact Semble can have, try out its free online loan calculate by clicking here.