Bank-Speak 103: Defining Terms & Decoding Acronyms

Nothing has the power to say, “I’m your mark,” as does sitting dumbfounded in a conversation you don’t understand. Language is a powerful tool and one that can be employed as a formidable weapon. Americans tend to be a don’t mess with me, beefy lot until we cross our own borders. According to the U.S. Census Bureau a mere 1 in 5 of us can speak in two or more languages. A foreign language in a foreign land creates an inarguable sense of vulnerability. Ironically, we can stay right at home and squirm uncomfortably during a telephone call that we ourselves initiate.

Personal interactions are immediate, and they can readily catch us off guard. It starts with an 800#, an automated connection, and a directive to wait. We anticipate English, and shortly after the obligatory hold is answered, familiar words turn to Bank-Speak within moments. “We’ll start with your PFS, look into your projected NOI, establish a likely DTI, and after assessing the leverage on your business, we’ll determine a realistic LTV.

That sentence is enough to make any venerated Mom/Pop shop successor feel naked on an audio-recorded phone consultation. Let’s cover those missing swatches of clarity ASAP! There is an insulation of formality in any business interaction, and the more informed you are as a new loan applicant, the more you’ll be able to navigate discussions of rates, terms, and the sum total of your business’s value on paper. That paper starts with your itemized tally of assets including bank accounts, insurance policies, securities, and property — your Personal Financial Statement (PFS).

Once you’ve disclosed your assets, you’ll need to determine and outline the amount of money your business regularly generates otherwise known as your Net Operating Income (NOI). A stable NOI is easier to work with for obvious reasons; an NOI that fluctuates indicates more risk in paying installments on money owed.

If you’ve been a small operation and haven’t needed to rely on loans, congratulations! You’re the rare entrepreneur starting with zero Debt Service (DS). The sum total of your expenses includes the cost of operation without the burden of paying off the principal and interest of existing loans. More commonly, a business carries the onus of past borrowing, and that will be factored into its eligibility to qualify for another loan.

A new loan application will consider your viability with a formula called Debt-Service Coverage Ratio (DSCR). Your NOI will be divided by your DS. In simple terms your projected earnings will be divided by the amount of principal and interest you currently carry. Generating the bare minimum to cover the cost of business equals a “1” on your DSCR. Alternatively, generating five times the cost of running your business equals a “5” on your DSCR. The higher your DSCR, the brighter your borrowing opportunities will be.

It’s possible that you’re a newcomer to business and don’t have a DSCR. A look at your personal debt in relation to your gross income will offer lenders a Debt-to-Income ratio (DTI). There may be a loan product that will service your transition to business with a personal loan based on this ratio.

It’s time to introduce the “L Word”. When business is booming, growth requires investment. That’s something like moving out of the basement start-up and into a storefront. Investing money to support greater profits tends to be an initial setback financially. If judiciously engineered, the expense of expansion is gradually balanced by the growth of business.

Leverage refers to the debt acquired through the cost of purchasing assets such as real estate, machinery, and vehicles. It’s essential for a business to generate profits that offset acquired debt. If the profits are less than the total of business expenses, loan principal and interest otherwise known as Debt Service (DS), the company is considered to be over-leveraged.

Once your submission has demonstrated the state of your worth, a lender will decide if your application is viable. Once approved as a borrower, the lender determines the size of loan for which you qualify; the property’s value is appraised, and a Loan to Value (LTV) is determined. This is another ratio which divides a mortgage amount by the appraised property value. The greater the downpayment, the less you need to borrow, and the better your terms will tend to be.

Lenders strip away all sentiment and illusions of grandeur in the application process. By learning Bank-Speak (BS?), you can avoid unnecessary discomfort while exposing your bottom line. Your vision, business plan, and relevant questions are best steered toward your broker. As your advocate, your broker will organize those ratios to cover your assets with a tailor-fit presentation.