What Banks Actually Want: A Debt Readiness Guide
By Mike White, 2-Squared Advisory
Most $3M–$15M owners learn what a bank actually wants after they've been declined. The package is well-defined, the math is straightforward, and the reasons banks say no are predictable. Here's the underwriting view of your business — and what to fix before you walk into the meeting.
What banks actually underwrite
1. Cash flow coverage
The first calculation a credit officer runs is DSCR — your EBITDA (or adjusted cash flow) divided by your annual debt service on existing debt + the new loan. Most banks want at least 1.25x. SBA usually 1.15x–1.20x. Below 1.0x is a hard decline.
2. Leverage
Total funded debt to EBITDA. Comfortable zones: under 2.0x is easy, 2.0x–3.5x is normal, 3.5x–4.5x needs a story, and above 4.5x is private credit or no deal.
3. Collateral coverage
Banks look at A/R (advance rate ~80% on current), inventory (~50%), equipment (~50% of orderly liquidation value), and real estate (~70–75% of appraised value). The gap between collateral and loan size is what the personal guarantee is for.
4. Customer concentration and contract quality
A single customer over 25% of revenue triggers underwriting questions. Over 40% and the bank may haircut that revenue from cash-flow availability. Contracted vs. spot revenue matters.
5. Reporting quality
Cash-basis books, no monthly close, and no A/R aging will downsize your facility or get you declined. Accrual-basis financials, prior-year reviewed (or audited above ~$5M revenue), monthly close within 15 days, and a clean tax return are the baseline.
The package banks want to see
- Three years of accrual-basis financial statements + interim YTD
- Three years of business tax returns + most recent personal returns of guarantors
- A/R and A/P aging (most recent month-end)
- Customer concentration list (top 10–20 customers with revenue %)
- Debt schedule (every loan, lease, and line — balance, rate, payment, maturity)
- 13-week cash flow forecast
- Borrowing-base certificate (if asset-based)
- Personal financial statement for each 20%+ owner
- Use of proceeds — specific, line-itemed
- One-page executive summary of the business and the ask
Where most owners get hurt
Cash-basis books
Cash-basis statements understate accrued liabilities and overstate cash availability. Banks know this and adjust — usually too aggressively. Accrual basis is worth the cost of conversion.
"Owner add-backs" the bank doesn't accept
Banks accept some normalizations (one-time legal, true owner perks), but not all the add-backs an M&A buyer would. If you're presenting $1.6M of "real" EBITDA on $1.1M of reported, expect a fight. Get the bank's add-back framework before you build the package.
What to fix in the next 90 days
- Convert books to accrual if you aren't already.
- Close monthly within 15 days, every month, for three months running.
- Build a 13-week cash forecast you can hand to a banker on a Monday.
- Get prior-year financials reviewed by a CPA if revenue is above ~$5M.
- Build a clean debt schedule and reconcile it to your balance sheet.
- Document the customer concentration story — and what you're doing about it.
Related services
Frequently asked questions
What is DSCR and what number do banks want?
DSCR (Debt Service Coverage Ratio) is EBITDA divided by annual principal + interest payments. Most commercial banks want at least 1.25x; SBA 7(a) usually 1.15x–1.20x; private credit varies. Below 1.0x and you're not covering your debt from operations — period.
Why do banks ask for personal guarantees?
Because most $3M–$15M businesses don't have enough hard collateral to cover the loan, and the owner is the most reliable judgment of the business's risk. PG is normal; SBA loans require it. The question to negotiate is the carve-out, the release trigger, and the amount — not the existence.
What's the difference between SBA 7(a) and conventional bank debt?
SBA 7(a) is partially guaranteed by the federal government, which lets banks lend at longer terms (often 10 years) and to businesses they wouldn't otherwise underwrite. Trade-off: more paperwork, mandatory PG, prepayment penalties on longer terms, and fees. Conventional debt is faster and cheaper for businesses that can qualify on their own.
How long should we expect the bank process to take?
Conventional working-capital line at an existing bank: 4–8 weeks. New banking relationship + term loan: 8–12 weeks. SBA 7(a): 60–120 days from full package submission. Start the conversation 6 months before you need the money.