The 3 ratios your banker actually looks at before approving a loan

What a banker is actually trying to figure out

A small business loan officer is not really evaluating your business. They're evaluating one specific question: if I lend this person money, what is the realistic chance they can't pay it back? Everything else — the relationship, the pitch, the projections, the cup of coffee you bought them — is wrapped around that one question.

That question gets answered with three ratios. The same three, on every applicant, every time. Loan officers don't love this part of the job — it feels reductive, and most of them have stories about ratios that lied either way. But the ratios are what go in the credit memo, and the credit memo is what the committee looks at. The ratios are the language.

If you're thinking about applying for a term loan, a line of credit, an SBA loan, or any kind of bank financing for a business under roughly $20M in revenue, knowing the three ratios means you can compute them yourself, see exactly how you'll show up on the credit memo, and fix the problems before you walk in. The alternative is finding out three weeks after you applied that the answer is no, and being told something vague about “cash flow concerns.”

Ratio 1: DSCR (Debt Service Coverage Ratio)

This is the most important number. If only one ratio mattered, this would be it. DSCR asks: after the business pays its operating expenses, does it generate enough cash to cover its debt payments — including the new loan you're applying for — with room to spare?

The formula in the most common form:

DSCR = EBITDA / Annual debt service (principal + interest)

A DSCR of 1.0 means the business covers its debt payments exactly — no margin for a bad quarter. A DSCR of 2.0 means the business generates twice the cash it needs to service debt. Bankers want a margin of error because real businesses have bad quarters.

The benchmarks bankers actually use:

1.25 is the standard floor for most commercial loans. Anything below this is a hard sell to the committee. Some lenders will go to 1.20 for established businesses with strong collateral, but you're fighting uphill.
1.40–1.50 is comfortable. The committee doesn't need to debate; the loan officer can present it without spending political capital.
2.00+ is strong. You'll get the best rates and terms the bank offers, because you're no longer competing with marginal applicants.
SBA loans typically require 1.15 minimum on the historical numbers and 1.20 on the projected numbers after the new debt. Different program, different math, but same idea.

The trap most owners fall into: they compute DSCR using existing debt service only, and forget the new loan is part of the calculation. Bankers compute it as combined debt service — what you owe today plus what the new loan would add. A business with a 1.50 DSCR today might be 0.95 after the proposed loan, and that's the number on the credit memo.

Ratio 2: Debt-to-Equity

Debt-to-equity tells the banker how much of your business is funded by debt versus your own (or your investors') money. The question it answers: if things go bad, who absorbs the first wave of losses — the bank, or the owner?

Debt-to-equity = Total debt / Total equity

The reason this matters to a banker is structural. Equity absorbs losses first. Debt absorbs losses only after equity is wiped out. A business with $1M in debt and $2M in equity can lose $1.5M and still pay back its debt in full. A business with $1M in debt and $200K in equity can lose $300K and suddenly the bank is at risk. Same loss in absolute terms, completely different risk profile.

The benchmarks vary widely by industry. A capital-intensive manufacturer often runs 1.0–2.0 because the equipment is genuine collateral. A services business with no inventory and no equipment is a different animal — bankers want to see lower leverage there because if the business folds, there's nothing tangible to repossess.

Below 1.0 is conservative — you have more equity than debt. Easy approval territory.
1.0–2.0 is normal for most established businesses. Bankers don't blink.
2.0–3.0 raises questions. The loan officer will want to see why — recent expansion? equipment purchase? — and will scrutinize the rest of the application more carefully.
Above 3.0 is a problem for almost any business. Even with a great DSCR, this level of leverage says “your business has very little margin if anything goes wrong.”

Ratio 3: Current Ratio

The current ratio asks: can the business meet its short-term obligations from its short-term assets? Cash, receivables, inventory — that versus the bills, payroll, and other liabilities due in the next twelve months.

Current ratio = Current assets / Current liabilities

A current ratio under 1.0 means the business owes more in the next twelve months than it has resources to pay. That's a near-term solvency concern. The business might still be profitable; it might still service its debt fine; but the short-term math says trouble is structurally close.

A bank looking at a 0.9 current ratio is thinking: “I could lend this person money and the business could still fail next month from a vendor dispute or a customer paying late.” That's not the kind of headache the loan officer wants on their books.

Below 1.0 is a yellow flag at minimum, often a hard no. The exceptions are SaaS businesses with heavy deferred revenue (which inflates current liabilities in a way that overstates risk) and a few other quirky categories.
1.0–1.5 is functional but bankers will look closely at the AR aging and inventory quality to make sure the “current assets” are real.
1.5–2.5 is comfortable. Most healthy small businesses live here.
Above 3.0 might raise a different question — why is so much capital tied up in current assets? Sometimes it's slow inventory; sometimes it's uncollected receivables; sometimes it's genuinely conservative working capital management. The banker will ask.

The honorable mention: interest coverage

Some lenders also look at interest coverage (EBITDA divided by interest expense) as a separate check. It's related to DSCR but isolates the question: forget principal repayment, can the business cover even just the interest with its operating cash flow?

Bankers want to see interest coverage above 3x for most commercial loans. Below 2x is concerning. Below 1x means the business isn't generating enough cash to cover even the cheapest part of its debt service, which is a much deeper problem than DSCR alone reveals.

A worked example: a small construction company

Let's walk through realistic numbers. A residential framing contractor, $2.4M annual revenue, considering a $400K equipment loan to buy two new trucks and a small excavator. Term: 7 years. Rate: 8%. Annual debt service on the new loan: roughly $77K (principal + interest).

The business's current numbers:

EBITDA: $310K (12.9% of revenue)
Existing annual debt service: $42K (truck loans, line of credit)
Total debt: $290K
Total equity: $480K (retained earnings + paid-in capital)
Current assets: $385K (cash, AR, work-in-progress)
Current liabilities: $215K (AP, accrued expenses, current portion of debt)

Running the three ratios with the new loan included:

DSCR (post-loan): $310K / ($42K + $77K) = $310K / $119K = 2.61. Strong. Comfortable margin.
Debt-to-equity (post-loan): ($290K + $400K) / $480K = $690K / $480K = 1.44. Normal for an asset-heavy trade.
Current ratio: $385K / $215K = 1.79. Comfortable.

This is an approvable application. The committee won't have any of the three ratios as a sticking point. The loan officer will spend time on the relationship, the business plan, and verifying the numbers, but the math itself is clean.

Now imagine the same business with $80K of EBITDA instead of $310K (a bad year, or a younger business). The DSCR drops to 0.67. The application is dead at the committee stage, regardless of how compelling the rest of the story is.

The order to fix them in

If your numbers don't qualify yet, fix them in this order:

Current ratio first. It's the most sensitive to short-term operational changes. Collect receivables faster, hold inventory leaner, push payables out within reason. You can move this ratio meaningfully in one quarter if you focus.
DSCR second. The two levers are EBITDA (raise prices, cut overhead, drop unprofitable customers) and debt service (refinance higher-rate debt to lower-rate debt, or pay off short-term debt aggressively before applying). Six to twelve months of focused attention can move a 1.0 to 1.4.
Debt-to-equity last. Hardest to move quickly because it's built up over years. Building retained earnings (i.e., not distributing every profit dollar) is the durable answer. Equity injections work but cost real money. Refinancing existing debt at lower rates doesn't move debt-to-equity but does help DSCR.

What to do if your numbers don't qualify yet

Three options, ranked by what most owners should actually do:

Option 1: Wait. Spend two to four quarters fixing the underlying numbers, then apply. The application gets approved cleanly, you get better rates, and you avoid the personal-guarantee or collateral concessions a marginal application requires. This is the right move 80% of the time and the move 80% of owners avoid because waiting feels like inaction.

Option 2: Apply at a different bank. Loan officers at smaller community banks and credit unions sometimes have more discretion than big-bank loan officers. Same ratios, but the committee meeting is shorter and the relationship matters more. Worth a try if the numbers are close to qualifying.

Option 3: Look at non-bank financing. SBA loans (with the 1.15 floor), equipment financing companies (which use different criteria, mostly the equipment itself as collateral), invoice factoring, merchant cash advances, revenue-based financing. All have their place; all are more expensive than bank debt; all should be a deliberate choice, not a default fallback.

The bigger point

Most owners experience a loan application as opaque — they fill out forms, they meet the loan officer, they wait three weeks, they get a yes or no, and the reasoning behind either answer is mostly invisible. That's why “my banker said no but I don't really know why” is one of the most common stories small business owners tell each other.

But the answer isn't opaque. It's three numbers, plus a credit check, plus a few qualitative judgments about industry and management. You can compute the three numbers before you ever walk in. Most loan officers will tell you the ratios if you ask — not as a blanket policy, but because experienced ones know that informed applicants are better applicants.

The other side of this: if you're looking at your own numbers and the three ratios are clean, you're probably underborrowing. Many small businesses with strong DSCRs and conservative leverage could deploy debt at attractive rates to grow faster, and don't, because the owner has internalized a fear of debt that doesn't match the numbers. The ratios aren't just a defensive tool; they tell you when you have room.

For a structured run through these three ratios plus everything else a banker (or a buyer) might look at, see the Financial Health Check — it computes all of them, flags anything outside the healthy range, and explains how to address it.