All companies strive to achieve maximum profit, so the debt coverage ratio of DSCR is of great importance. Solving financial issues and increasing the volume of sales depends on attracted credit injections and investments.
The ability to fulfill obligations on loans can be determined by the debt coverage ratio DSCR (Debt Service Coverage Ratio).
DSCR indicator – the ratio of net income and the amount of payments on loan obligations for the calculated period.
In the current economic situation, it is difficult to do business without using certain credit options. California DSCR loans
are aimed to solve this task. Credit funds are used in the following cases:
- purchase of new equipment;
- increasing the range of products;
- marketing companies;
- project financing;
- everyday operations;
- business expansion.
Ways that increase operating income are costly. Reimbursement of debt with one’s own financial capabilities is difficult, and for young organizations it is impossible. In the process of financial inflow by obtaining loans or attracting investors, each of the parties has its own benefit:
- increase in the company’s income even taking into account the appeared debt obligations;
- investor’s expectation of payment of dividends;
- receipt by a credit institution of income from the payment of interest on a loan.
- In order to receive credit funds, an organization must be financially stable.
Determines the probability of acquiring additional resources debt coverage ratio.
How to calculate loan repayment terms?
A criterion that characterizes the ability of an enterprise to meet its loan obligations on time: the interest payable coverage ratio or ICR.
This parameter compares the interest on the loan for the billing period (one year) and income before payment of interest and tax liabilities for the same period. It is used to analyze the assessment of financial stability for the reporting period.
Calculated using the formula: EBIT / Interest payable, where EBIT is earnings before interest is calculated.
Coefficient value:
- with a decrease in the indicator, the probability of bankruptcy increases;
- a high indicator reflects the stable financial performance of the company;
- in the case of a very large indicator, care must be taken in choosing credit funds that affect the decrease in the return on equity;
- a score less than 1.5 causes fluctuations in the company’s ability to repay interest on the loan;
- ICR less than 1 – the inflow of funds is not sufficient to pay off debt obligations.
- To obtain accurate results of the indicator, calculations are carried out over a longer period of time in dynamics, so as not to take into account random deviations.
How to determine the balance between equity and borrowed capital?
To determine the success of the company, they use an indicator that holds the ideal ratio of equity and borrowed capital – the internal debt ratio. This ratio tracks the inflow of credit funds.
The indicator defines the following:
- current profitability and the amount of future dividends received by the investor;
- the effectiveness of managerial decisions made by the manager for the calculated period;
- expediency of issuing loans, assessment of the level of risks by creditors.
A number of formulas are used to determine this index. During the calculations, the following is determined:
- result range 0 – the company correctly uses attracted and equity capital;
- indicator 1 – shortage of working capital, which means that it is necessary to inject credit funds;
- value greater than 1 – the organization becomes insolvent and will not be interesting for investment and provision by creditors.
Creditors have the right to file a lawsuit to declare the organization bankrupt if the indicator is significantly greater than 1.
How to calculate the amount of the proposed loan?
Calculation of the LTV of the security of the loan is used by banks when calculating the amount of the loan. This indicator determines the amount of credit that the borrower receives depending on the value of the security provided by him. It also determines the amount of the required contribution when applying for a loan.
The higher the indicator, the less funds the borrower needs to deposit. Financial experts individually set the size of this coefficient in the course of developing credit programs.
