Real-Life Math
All bankers have worksheets and formulas they use to determine if clients are capable of repaying their business loans. The most common one used is called a debt serviceability worksheet.
"We use these forms to calculate the 'surplus' cash a business has available. Then we know if the business has enough funds to pay off a new loan," said Doug Wakefield, a commercial account manager.
Here's an example of how it works.
Bob, the owner of a successful shoe store, needs a loan from his bank to do some renovations. His banker calculates that Bob's payments for this new loan will be $250 per month for 1 year. Bob is confident the bank will lend him the money.
But Bob already has some business loans with the bank. They are:
- Operating loan -- total payments for 1 year: $1,000
- Term loan 1 -- total payments for 1 year: $2,000
- Term loan 2 -- total payments for 1 year: $4,000
The banker also reminds Bob that he should set aside $2,000 this year to cover any unexpected expenses.
Bob feels confident that he has enough surplus cash to cover all his old loans and the new one -- and still put aside the $2,000.
But his banker is not so sure. He checks Bob's account on the computer and quickly fills in a debt serviceability worksheet.
"You'll have $13,000 surplus this year," he announces.
Will Bob get the new loan?