5 Numbers a Banker Reads First When You Ask for a Line of Credit

5 Numbers a Banker Reads First When You Ask for a Line of Credit

A commercial banker decides how interested they are in your business in about the time it takes to read two pages. Business line of credit requirements sound like a checklist, and the published version usually is: two years of returns, interim financials, a personal financial statement. That is the paperwork. It is not the decision.

The decision comes from five calculations the banker runs on your numbers, often before you finish the meeting. None of them are secret. All of them can be improved in advance, and most owners never look at them until after a decline.

A line of credit is also underwritten differently than a term loan. A term loan is a bet on one asset and a fixed payment. A revolving line is a bet on your working capital cycle, so the questions are about whether the line will actually revolve or quietly become permanent debt.

1. Debt Service Coverage Ratio

This is the first number, and it is close to a gate.

Debt service coverage ratio compares the cash your business generates to the debt payments it must make. There is no single formula. A common approach starts with net income and adds back interest, taxes, depreciation, and amortization, then makes adjustments, but plenty of lenders compute cash available for debt service after cash taxes and after the owner distributions the business actually has to make, which produces a materially lower ratio on the same financials. Ask which convention your bank uses, because the answer can move the number by a wide margin. Two of the adjustments surprise owners. Owner compensation above a reasonable market salary usually gets added back, which helps you. Discretionary personal expenses running through the business usually get added back too, which helps the ratio but tells the banker something about your books.

Most institutions look for coverage comfortably above 1.0, with 1.25 as a common floor and stronger numbers earning better terms. Thresholds vary by bank, industry, and facility type, so treat any specific figure as directional rather than universal. The practical implication: if your coverage is thin, the fastest lever is usually reducing existing debt service, not increasing revenue in the last quarter before you apply.

2. The Revenue Trend, Not the Revenue Number

Bankers read trailing twelve month revenue and then read the shape of it.

A business at $4 million that was at $3.2 million and $2.6 million in the two prior years reads as expansion. The same $4 million after a $5.5 million year reads as contraction, and contraction changes the conversation from growth financing to survival financing. The number is identical; the underwriting is not.

If your most recent year was down for an explainable reason, explain it in writing before you are asked, with the numbers that support it. Unexplained declines get interpreted pessimistically, because that is the conservative choice and the banker's incentives reward conservatism. The limitation here is real: a genuine downturn cannot be reframed into a strength, and trying to do it damages credibility you will need later.

3. Working Capital and the Current Ratio

Working capital is current assets minus current liabilities. The current ratio expresses the same relationship as a multiple. For a revolving line, this is the number that speaks most directly to the purpose of the facility.

Bankers use it to answer a specific question: is this line going to fund a timing gap, or is it going to fund a shortfall? A business with healthy working capital that occasionally needs bridge cash between receivables and payroll is the ideal borrower for a revolver. A business with negative working capital is asking the line to cover a structural deficit, which is a different and less fundable request.

Watch how your line itself is classified. Once drawn, the outstanding balance typically sits in current liabilities, which pushes the ratio down. Borrowing to improve liquidity can make the reported liquidity look worse, and it is worth understanding that mechanic before you model it.

4. Accounts Receivable Aging

For a line secured by receivables, the aging report is the collateral appraisal.

The banker is not reading the total. They are reading the buckets. Receivables past 90 days are frequently excluded from the borrowing base entirely. Concentration matters too: if one customer is 40 percent of your receivables, the bank is underwriting that customer's credit as much as yours, and it may apply a concentration limit that reduces how much you can actually draw.

This is the number most improvable before an application, because it responds to collection effort rather than to structural change. It is also the one that most often reveals a bookkeeping problem instead of a collections problem. Invoices sitting in the 120-day bucket that were actually paid, or paid partially and never applied, are common and they cost you borrowing capacity for no reason.

5. Owner Distributions Against Net Income

This is the number owners forget the bank can see, and it carries more weight than its size suggests.

If the business earned $500,000 and distributed $600,000, the banker learns that cash leaves the company faster than it accumulates. That is not a moral judgment, it is a repayment risk assessment, and it often results in a distribution covenant limiting what you can take out while the line is outstanding.

Read those covenants carefully before signing. A distribution limit that is comfortable in a good year can become a genuine constraint in a year when you need to cover a personal tax bill on pass-through income. Ask for the covenant math in writing, with an example, and confirm what happens if you trip it.

What to Fix, in Order

If you are 90 days from a meeting, work in this sequence:

• Clean the receivables aging first. Apply unapplied payments, write off what is genuinely dead, and collect what is collectible. It is the fastest real improvement.
• Then separate personal from business. Every discretionary personal expense in the ledger is a question you will have to answer out loud.
• Then get accrual-basis interim statements. Cash-basis interims make revenue trends and working capital look erratic, and erratic reads as risky.
• Then model your own coverage ratio. Walk in already knowing the number, because being surprised by it in the meeting is worse than the number itself.

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Support like this improves how your numbers are presented and understood. It does not change the underlying performance, and no preparation guarantees approval. Compare a few firms on the Sam's List fractional CFO directory before you decide.

Frequently Asked Questions

What debt service coverage ratio do banks want for a line of credit? Many commercial lenders look for coverage of at least 1.25, meaning cash flow covers debt payments with a 25 percent cushion, though requirements vary by institution, industry, and facility size. Ask for both the threshold and the formula, since some lenders start from EBITDA while others deduct cash taxes and required owner distributions first, which changes the result substantially.

How is a line of credit underwritten differently than a term loan? A term loan is underwritten against a specific purpose and a fixed repayment schedule. A revolving line is underwritten against your working capital cycle, so the bank focuses on receivables quality, liquidity ratios, and whether the balance will actually be repaid and redrawn rather than staying permanently outstanding.

Do I need audited financial statements to get a line of credit? Usually not for smaller facilities. Most banks accept internally prepared or accountant-prepared statements alongside tax returns, though larger lines and asset-based facilities may require reviewed or audited statements. What matters more at smaller sizes is that interim statements are accrual-basis, current, and consistent with the returns you filed.

Will drawing on my line hurt my financial ratios? It can. An outstanding balance typically sits in current liabilities, which reduces working capital and the current ratio even though you now hold the cash. This is normal and expected, but if you are approaching a covenant threshold, model the effect of a draw before you make it.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.