Equity can be built up through retained earnings or by the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than four times the amount of equity. So if you want a loan for your business, make sure that there is enough equity in the company to leverage that loan.
Owners will be required to put some of their own money up when applying for a loan. This is where debt-to-equity ratio plays apart. Lenders will also evaluate a business on the following. Net worth, the amount of equity in a business, lenders usually require a second source of repayment.
Collateral is personal and business assets that can be sold if the business is not able to repay the loan. If the business has not acquired capital it will need a co-signer to obtain a loan. Collateral is an insurance policy that the lender will be able to get the money loaned back.
Collateral-coverage ratio is computed as part of the loan evaluation process. This ratio is calculated by dividing the value of the discounted collateral by the loan request.
Lenders will also evaluate the borrowers’ ability to run a business. The banks will take into account past management experience, as well as education. It is the banks job to protect their customer’s money. That is why lenders dig into every aspect of the business, and the owner before issuing a loan.
For more information: http://www.amazon.com/Understanding-Business-Loans-Grants-Michael-ebook/dp/B00OAUA4XE/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1414011056&sr=1-1&keywords=understanding+business+loans+and+grants