Calculate Security Coverage Ratio – This is the most required ratio formula for loan approval. Majority of loan inclusive of Term loan and overdrafts are made eligible based on this formula. Asset coverage ratio is the measurement tools for company debt obligations against its assets.
There are many bankers which define the security coverage ratio as the specific ability to cover the amount of its existing or proposed debts. Under this all the tangible and monetary assets of a company are measured against its outstanding debts. This shows the overall liquidity position of company’s current financial situation.
The balance sheet figures which are considered for calculating the security coverage ratio are cash on hand, long-term financial obligations, and current liquidity assessments.
What is security coverage ratio ?
Security coverage ratio allows the banker’s to reasonably predict the future earnings of the company and to asses the risk of insolvency.
Calculate Security Coverage Ratio, Formula?
There are various method to calculate the security coverage ratio. Watch out for the most common method of assessment of Security Coverage ratio, commonly used in Banking loan proposals.
- Difference of Current liabilities and short term debt.
- Difference of Total assets and intangible assets (like which are not physical in nature. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies)
- Difference of above 1 and 2 and divided by Total Debt or loan required.
Security Coverage Ratio Calculator ?
Security Coverage Ratio = ((Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt)) / Total Debt Obligations
Benchmark Security Coverage Ratio
A good security coverage ratio is 1.5. However, the ideal security coverage will vary depend on the industry i.e. in MSME the coverage ratio is relaxed, where as in Mortgage loan it is almost 1:2.
There are many of the proposals which are assessed by the loan department are on projection or estimation. Majority of the business proposals including MSME loans assessed needed to be fixed based on the security coverage ratio. While in projected / estimated balance sheet if the security in the term of primary are projected at higher side the overall security coverage ratio will not show the actual strength of the company or individual. This is the negative aspect of the security coverage ratio.