How a Business with Existing Debt is Assessed

At multiple points in its evolution, a small business may require different forms of financing. For example, a company that supplies its product to retailers or large distributors may periodically need invoice financing to cover expenses. Other businesses in need of quick financing for short-term expenses may be drawn to high-interest cash advances. To that end, it is possible for a business owner to put in an application for a term loan, while still paying off existing debt.

Key to evaluating such an application is understanding the existing debt: what the outstanding balance is, as well as the repayment terms. If the existing lender mandates that the business cannot take on any other debt until it is paid off, for example, the term loan cannot be approved. The business balance sheet should reflect the existing debt. The business credit bureaus should also have it on record. Like every other application, a calculation of Debt Service Coverage Ratio (DSCR), will be necessary to determine if the business's projected net income will cover all debt obligations. To be approved for a loan, DSCR must be, at a minimum, 1.15 or 2.0, depending on borrowing history. Again, as with all loans, we will place a UCC lien against the business' assets.

Taking on debt can be a strategic way to maintain control of a company while supercharging its growth. Nevertheless, it is important not to take on more debt than the business can support. Imprudence in this realm can be extremely destructive.