That you want create your business, perform a recovery or start a new project aiming to develop a new activity, the bank loan is essential for the realization of your project. But to get it, you have to put all your chances on your side, and that is why it is important to respect certain rules, including the debt capacity of your company, which is the most important capacity among them. .
In this article, we’ll show you how to find out your business’s borrowing capacity and how to calculate it.
What is the borrowing capacity of a business?
The borrowing capacity, also called debt capacity, is the maximum capacity that a company has to borrow from the bank and thus endanger its budget balance. When you borrow like this, the bank will finance up to 70% of the amount of your project, the remaining 30% must then come from personal contributions, or money from relatives, namely the love money.
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To calculate the borrowing capacity of a business, there are many things to take into account. Indeed, the bank will study various parameters, in order to make a budget forecast that can be allocated to you.
First, the bank will study your equity. For this, it will look at the starting share capital that your company received, as well as reserve funds and your retained earnings.
Then the bank will study your financing needs. These financing needs will have a very big impact on your borrowing capacity and that is why they are so carefully considered. So that your financing needs can be analyzed, you can highlight the following parameters in your business plan, namely:
- The future expenses planned by your company
- Your balance sheets and forecast results
- Your payment schedule
- The expected amount of your due dates
These different data will allow the bank to determine your ability to be profitable, which makes it possible to adapt the borrowing capacity.
Finally, the bank will study all the loans you have in progress, and the amount of monthly payments you have to repay will also be taken into account in your borrowing capacity. If the monthly payments are already seen as a big burden on the stability of the business, the bank will probably refuse to grant you a new loan.
How do you calculate the borrowing capacity of your business?
Self-financing calculation
The self-financing calculation, or CAF, makes it possible to measure the profitability of a company. This therefore allows you to know each year the amounts of money entering and leaving your business. It is like a valuation of the wealth of the company. This is why, as its name suggests, these riches allow the company to self-financing.
CAF is a ratio which allows to know:
- The company’s self-financing capacity
- The company’s repayment capacity
- The financial health of the company
And to calculate the CAF, here is how to go about it:
CAF = Gross operating surplus + Non-disbursable expenses – Non-disbursable income
or
CAF = net income – non-cashable products (reversals of provisions for operating, financial and exceptional income) – proceeds from the sale of assets + other non-disbursable charges (operating, financial, exceptional allocations) + net book value of assets sold – share of investment grants transferred to profit or loss for the year
The non-disbursable products represent receipts with no entry into the treasury, i.e. reversals of provisions and depreciation, while non-disbursable charges represent expenses that do not generate any cash outflow.
The repayment or debt capacity
Once the CAF is obtained, you can start calculating your bank borrowing capacity. Usually, this can be calculated as follows:
Borrowing capacity = Self-financing capacity * 3 (or even 4)
If you have to multiply by 3 or even 4, it’s because the banks consider that you can repay your loan over 3 or even 4 years. This figure is of course the result of nature of your project and the funding it needs. If you are a real estate investor, however, your borrowing capacity may be capped at 20 years.
Also note that your repayment annuities must not exceed half of your cash flow. If so, ask for an increase in the term of your loan for added security.
The debt ratio
Finally, calculate your rate of endettement. This ratio corresponds to a financial analysis that can compare short-term assets and debts. This ratio must be 1 minimum to be positive. You can calculate it as follows:
Rate of endettement = current assets / current debts
Analyzing the borrowing capacity of your business is essential so as not to end up in debt in the future.
What you should take away from this articleis that the banker will analyze your ability to repay the loan, and for that will linger on your balance sheet by doing a deep analysis of it, add the annuities of this future loan to the different loans, and your self-financing capacity.
Your borrowing capacity is entirely up to you and available resources in your business, so be realistic about the projects you want to set up, because the loan does not always follow behind.
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