The financial ratios banks use in underwriting a revolving line of credit for a mid-size company fall into four groups: cash flow coverage, leverage, liquidity and how quickly receivables and inventory turn into cash. You can compute every one from your own balance sheet and income statement before the bank does, then rerun them with the proposed line drawn, which is the version a credit analyst will test.
Which financial ratios do banks use in underwriting a revolving line of credit for a mid-size company?
The Federal Reserve's Commercial Bank Examination Manual (Section 2080.1, Commercial and Industrial Loans, effective November 2020; the manual's latest supplement is dated February 2026) sorts borrower ratios into four categories: profitability, efficiency, leverage and liquidity. It adds, "Evaluating cash flow is the single most important element in determining whether a business has the ability to repay debt." A secured revolving line often brings a borrowing base test as well.
| Ratio | How it's computed | What the bank reads from it |
|---|---|---|
| Debt service coverage (DSC) | The Fed manual's coverage ratio: "Cash flow before debt service divided by debt service (principal and interest)." EBITDA is the usual proxy. | Whether earnings cover scheduled loan payments |
| Fixed charge coverage | EBITDA less items such as unfinanced capital spending, cash taxes and distributions, divided by principal plus interest. The definition varies by agreement. | Cash left after spending the business can't skip |
| Funded debt to EBITDA | Interest-bearing debt divided by EBITDA, a common construction that varies by agreement | Years of earnings needed to repay the debt |
| Debt to tangible net worth | Total liabilities divided by net worth less intangible assets, a common construction that varies by agreement | Creditors' money against the owners' money |
| Current ratio | Current assets divided by current liabilities | Ability to meet obligations due within a year |
| Quick ratio | Cash and receivables divided by current liabilities, a common construction that varies by agreement | The same test without counting on inventory |
| Receivable and inventory days | 365 divided by turnover | How long cash stays tied up |
The Fed manual's balance-sheet ratio list (Section 2140.1, Agricultural Loans, effective May 1996, written for farm lending, though the formulas are standard) gives the current ratio as "current assets/current liabilities," the quick ratio as "liquid assets/current liabilities" and the leverage ratio as "total liabilities/net worth," which it says is "often called the debt-to-worth ratio." The OCC's Asset-Based Lending booklet (Version 1.1, January 2017) says receivable turnover "is calculated as sales divided by average accounts receivable" and inventory turnover "is a measurement of cost of sales divided by average inventory," with days equal to 365 divided by turnover.
For cash flow leverage, the FDIC's RMS Manual, Section 3.2 Loans (March 2026) lists typical leverage covenant ratios, in its syndicated lending discussion, as "Total Debt divided by EBITDA, Senior Debt divided by EBITDA and Net Debt (subtracts cash) divided by EBITDA."
How to calculate each ratio from your own statements
Take a wholesale distributor with $12,000,000 in sales. Every figure is an assumption for illustration.
| Balance sheet (year-end) | Amount | Income statement and cash items (year) | Amount |
|---|---|---|---|
| Cash | $200,000 | Sales | $12,000,000 |
| Accounts receivable | $1,500,000 | Cost of goods sold | $9,000,000 |
| Inventory | $1,800,000 | EBITDA | $1,000,000 |
| Total current assets | $3,500,000 | Depreciation | $200,000 |
| Net fixed assets | $1,500,000 | Interest expense | $120,000 |
| Payables and accruals | $1,700,000 | Income taxes | $170,000 |
| Current portion of term debt | $300,000 | Net income | $510,000 |
| Total current liabilities | $2,000,000 | Term debt principal paid | $300,000 |
| Long-term debt | $1,200,000 | Unfinanced capital spending | $150,000 |
| Total liabilities | $3,200,000 | Owner distributions | $100,000 |
| Net worth (no intangibles) | $1,800,000 |
EBITDA is net income plus taxes, interest and depreciation, or $510,000 + $170,000 + $120,000 + $200,000. Each ratio then takes one line of arithmetic:
- Debt service coverage: $1,000,000 / ($300,000 + $120,000) = 2.38
- Fixed charge coverage: ($1,000,000 - $150,000 - $170,000 - $100,000) / $420,000 = 1.38
- Funded debt to EBITDA: $1,500,000 / $1,000,000 = 1.50
- Debt to tangible net worth: $3,200,000 / $1,800,000 = 1.78
- Current ratio: $3,500,000 / $2,000,000 = 1.75
- Quick ratio: $1,700,000 / $2,000,000 = 0.85
- Working capital: $3,500,000 - $2,000,000 = $1,500,000
- Receivable days: $12,000,000 / $1,500,000 = 8 turns, or about 46 days
- Inventory days: $9,000,000 / $1,800,000 = 5 turns, or 73 days
The day counts use year-end balances in place of averages. If your working capital swings by season, run them at the peak and the low point.
How a proposed line changes every ratio
A bank won't stop at last year's numbers. SBA's lender rules, for one, call for ratio calculations "based on the pro-forma Balance Sheet and historical and projected Income Statements" (SOP 50 10 8.1, effective October 1, 2026), meaning your balance sheet with the new debt on it.
Suppose the distributor asks for a $1,500,000 line at prime plus 1.50%. With the bank prime rate at 7.00% on October 5, 2026, that's 8.50%. Assume draws fund receivables and inventory in equal parts, the line matures within 12 months and so sits in current liabilities, the balance stays out all year, and earnings and taxes hold at last year's level.
| Measure | Before the line | $600,000 drawn | $1,500,000 drawn |
|---|---|---|---|
| Line interest for the year | $0 | $51,000 | $127,500 |
| Debt service coverage | 2.38 | 2.12 | 1.83 |
| Fixed charge coverage | 1.38 | 1.23 | 1.06 |
| Funded debt to EBITDA | 1.50 | 2.10 | 3.00 |
| Debt to tangible net worth | 1.78 | 2.11 | 2.61 |
| Current ratio | 1.75 | 1.58 | 1.43 |
| Quick ratio | 0.85 | 0.77 | 0.70 |
Coverage here counts only interest on the line, since a revolver has no scheduled principal. Lenders differ on that, so ask.
Adding the same dollars to current assets and current liabilities pulls a current ratio above 1.0 down toward 1.0, so a line used as intended still lowers it. Spend the same $600,000 on equipment and it falls further, to 1.35, because the debt is current and the asset isn't. The Fed manual's list of potential problems with these loans includes "Working-capital advances funding long-term assets." And fixed charge coverage of 1.06 at full draw leaves six cents of cushion per dollar of fixed charges, so that's where this company would feel a covenant first.
What ranges do lenders look for?
We found no minimum ratios for an ordinary commercial line in the examiner manual sections quoted here, though the Fed's farm section gives rules of thumb for farm loans. Each bank's credit policy sets its own, and the numbers move with industry and deal. The OCC's Rating Credit Risk booklet (April 2001, updated June 2017) says, "Acceptable leverage ratios vary based on industry, loan purpose, covenant definition, CAPEX restrictions, and dividend payouts." It also has examiners compare a borrower's ratios "with prior periods and industry or peer group norms," so expect to be measured against your own trend and your peers.
A few reference points are published:
| Source | What it says | Where it applies |
|---|---|---|
| SBA SOP 50 10 8.1, CAPLines chapter | Debt service coverage "must be equal to or greater than 1.15 on a historical and/or projected cash flow basis and 1:1 on a global basis" | SBA CAPLines, up to $5,000,000 |
| BDC on debt service coverage | "A ratio of 2 or higher is considered healthy. A ratio of around 1 is considered less healthy." | General guidance from Canada's business development bank (read October 6, 2026) |
| BDC on the current ratio | "Most businesses work to maintain a current ratio between 1.70 and 2.0." | General guidance |
BDC itself cautions, "Ratios considered healthy or risky may vary between lending institutions and investment partners." Our guide to SBA debt service coverage walks through the SBA calculation.
How the ratios turn into covenants and a borrowing base
After closing, the ratios a bank underwrote tend to come back as financial covenants, and the mix depends on the kind of line. On an asset-based line, the OCC says the lender "places less reliance on financial covenants and more reliance on collateral controls and monitoring," and a financial covenant, when present, typically takes "the form of a minimum fixed charge coverage ratio, the definition of which can vary by borrower." For Working Capital CAPLines run without a borrowing base certificate, SBA says "balance sheet covenants such as a Current Ratio or Debt to Tangible Net Worth ratio should be tested quarterly, semi-annually, or annually."
The collateral test sits beside the ratios. The OCC says a borrower can typically draw "up to the lesser of the available borrowing base or the revolver commitment amount." SBA's Working Capital CAPLines cap advance rates at 80% of eligible domestic receivables and 50% of eligible inventory, with limited exceptions, and conventional lenders set their own. At those rates, if $1,250,000 of the distributor's receivables and $1,200,000 of its inventory were eligible, the base would be $1,600,000 and the $1,500,000 commitment would be the limit. Lose $250,000 of eligible receivables to slow payers and the base drops to $1,400,000, below the commitment.
What to fix before you apply
- Run the pro forma yourself. Rebuild the second table with your numbers and the line fully drawn, then find the thinnest ratio.
- Shorten receivable days. Five fewer days at $12,000,000 in sales frees about $164,000 you won't need to borrow.
- Match debt to assets. If short-term debt is carrying equipment, ask about moving it to a term loan. Only the next 12 months of principal then counts as a current liability.
- Plan distributions around the tests. They reduce net worth and, under the definition used here, fixed charge coverage. Holding back the $100,000 distribution lifts the fully drawn figure from 1.06 to 1.24.
- Bring three years of statements and a full debt schedule. SBA's CAPLine rules have lenders analyze an existing business on "the three most recent years of historical financial information" plus an interim statement, and call a debt schedule "including any shareholder debt" important.
- Clean up the aging. Past-due and disputed invoices typically drop out of a borrowing base.
Banks define and weight these ratios differently, so the same statements can clear one lender's policy and miss another's. EQ Funding isn't a lender. One application goes to lenders that compete for your business line of credit, and approval and terms vary by lender. If you're still sizing the request, see how big a line of credit should be.