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FINANCE TERMINOLOGY TO KNOW
Working Capital Ratio
Working capital is the difference between a company’s current assets, such as cash, accounts receivable and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable. Net operating working capital is a measure of a company's liquidity and refers to the difference between operating current assets and operating current liabilities.
Tangible Net Worth
Tangible net worth is a calculation of the net worth of a company that excludes any value derived from intangible assets such as copyrights, patents, and intellectual property. Tangible net worth for a company is essentially the total value of a company's physical assets. These assets can include (Cash, Accounts receivables, Inventory, Equipment, and Real estate).
Debt Service Coverage Ratio
A coverage ratio, broadly, is a metric intended to measure a company's ability to service its debt and meet its financial obligations, such as interest payments or dividends. The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends.
Net Operating Income for Commercial Mortgages
Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used in other industries, it is referred to as “EBIT,” which stands for “earnings before interest and taxes.”
Triple Net Lease
A triple net lease (triple-Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities, and all payments are typically the responsibility of the landlord in the absence of a triple, double, or single net lease.
THE FIVE C'S OF COMMERCIAL LENDING
Capacity
Does your business have the financial capacity to support debt and expenses? Typically, a business needs to have $1.25 of income to support every $1 of debt service. The extra $0.25 provides a cushion for your business to absorb unexpected expenses or a downturn in the economy.
Capital
Your business owns capital assets such as cash and equipment; is there enough to help support the financing you want? You and others may have invested capital in your business; how much? The answers say a lot about whether the business is one in which the bank wants to invest.
Collateral
Accounts receivable, inventory, cash, equipment, and commercial real estate are all forms of collateral that banks leverage to secure loans. In addition to looking at the value of your collateral, the bank will consider any existing debt you may still owe on that collateral.
Conditions
The state of the economy, trends in your industry and pending legislation relative to your business are all conditions that are considered by banks. These types of factors—often out of your control—may affect your ability to make payments.
Character
Work experience, experience in your industry and personal credit history are all character traits banks will consider. Your personal integrity and good standing—and the integrity and standing of those closely tied to the success of the business—are critically important.