Five financial ratios lenders check first — and what good looks like

Before a credit team reads your business plan, it reads your financial statements. A handful of ratios shape the first view of whether — and how much — a lender is willing to lend. Knowing them before you apply helps you present your case and anticipate questions.

1. Debt service coverage ratio (DSCR)

DSCR compares cash available for debt service with the debt payments due in the same period: (profit after tax + depreciation + interest) ÷ (principal + interest due). A DSCR below 1 means the business cannot meet repayments from operations alone. Many lenders look for comfortably more than 1, with the exact threshold depending on the sector and product.

2. Debt to EBITDA

This measures how many years of operating profit it would take to repay total debt. Lower is safer. It is especially important for term loans, acquisition finance and private credit, where the lender is underwriting cash flows over several years.

3. Interest coverage ratio

EBIT ÷ interest expense shows how many times operating profit covers interest. A thin cushion means a small fall in profit could make interest hard to pay.

4. Current ratio

Current assets ÷ current liabilities indicates short-term liquidity. Working capital lenders use it alongside the working capital cycle when setting limits.

5. TOL / TNW

Total outside liabilities ÷ tangible net worth shows how much the business relies on outside money compared with its own capital. Indian banks commonly use it to judge overall leverage.

Ratios are a starting point

Lenders also weigh the trend in these numbers, the quality of earnings, banking conduct, customer concentration and promoter track record. A company with a weaker ratio but a clear explanation — a one-off loss, a recently completed capex — can still be financeable when the case is presented well.