Can a business client repay a loan on time? This is an important question to small business lenders.
While no one can predict the future with 100% accuracy, lenders rely on a few simple arithmetic ratios to make credit decisions. These metrics of financial performance measure a company’s ability to pay short-term and long-term obligations:
Current ratio = current assets / current liabilities
Quick ratio = (cash + accounts receivable) / current liabilities or
Quick ratio = (current assets – inventory) / current liabilities
Debt ratio = total liabilities / total assets
Long-term debt ratio = long-term debt / total assets