There are no hard rules for calculating borrowing capacity because each business has unique financial circumstances that need to be taken into account. Instead, entrepreneurs can use different methods and indicators to achieve the same result. These methods can range from looking at balance sheet account data to checking cash flow statistics and ratings. A company's borrowing capacity is determined by its financial health and ability to pay loans. There are several ways you can calculate borrowing capacity. At the bottom of this article, we give a concrete example according to EBITA with figures. For completeness, we also give the other methods including:
1. Look at the balance sheet account: By looking at a company's balance sheet account, one can see how much debt the company has already taken on and what its assets are worth. This information gives insight into how much additional debt the company can take on before their finances come under pressure.
Suppose a company has a balance sheet account with assets worth €1,000,000 and liabilities worth €800,000, its borrowing capacity is €200,000 (€1 million minus €800,000). If the net asset percentage is even lower than 20%, it means there is more room for additional debt financing; if the percentage is higher, financing will depend more on the company's cash flow data and creditworthiness to determine how much debt can be taken on.
2. Calculate the net asset percentage: The net asset percentage is simply the ratio between a company's assets and liabilities (assets minus liabilities). If this percentage is low, it means there is less room for new loan bonds; if it is high, it indicates more flexibility in incurring debt.
3. Look at cash flow data: Cash flow data shows whether a company is generating enough revenue to pay off existing debt and take on any future obligation. If little to cash is available to handle loan payments, that leaves little room for additional financing.
Suppose the company has an annual net cash flow of €1 million and the average debt payment per year is €500,000, the borrowing capacity would be €500,000 (€1 million minus €500,000). If the company generates more revenue than debt repayments, more borrowing is possible; if less revenue is available than debt payments, it means that little or no additional funding is possible.
4. Check creditworthiness: It is also important to check whether a company has a good credit rating, so that financiers are confident that their loan will be repaid. In particular, look at the company's debt-to-earnings ratio, as well as any other factors that may affect its borrowing capacity.
What is creditworthiness and how do they calculate it?
A company's creditworthiness indicates its ability to repay loans. There are several ways creditworthiness can be calculated, such as by:
1. Look at the debt to earnings ratio (D/E): The debt-to-earnings ratio (D/E) provides information about a company's ability to meet its financial obligations. If this ratio is low, it indicates more liquidity; if it is high, it may indicate less flexibility in financing activities.
2. Look at cash flow data: Cash flow statistics show whether a business is generating enough revenue to pay off existing debt and take on any future obligation. If little to cash is available to handle loan payments, that leaves little room for additional financing.
3. Check profitability ratios: Profitability ratios show how profitably a company performs compared to other companies in the industry; if these ratios are higher than average, it suggests that the company is able to pay off new debt and still make a profit in addition .
A simple rule of thumb to calculate your loan amount according to EBITA (cash flow)
The betalingscapaciteit becomet berackend by eerst heyt toale inkomen at berekenand and dit farfullgens at deland by the maandelijkse schuldlast. Het resultaat is the betalingscapaciteit from iemand, uitgedrukt at maandelijkse bedragen. Bijvearbeeld: Als iemands maandelijks inkomen €3.000,- bedraagt and zhis maandelijkse schuldlast €1.500,- is, then is zhis betalingscapaciteit 2 (€ 3.000 / € 1.500). You can replace monthly income in a company with EBITA. Say you have an EBITA of €50,000 and you want to buy new machinery of €100,000 with a loan spread over 5 years. Your monthly repayment (without interest) is quickly calculated to be €1,666 per month or €20,000 per year. Your payment capacity is 2.5 (€50,000/€20,000). if the outcome of your ability to pay is higher than 2 - Then you stand a good chance of getting the loan.
