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Debt equity ratio

SRINIVAS REDDY MARAM (MANAGING DIRECTOR) (28 Points)

01 October 2013

Hi Friends,

I am planning to setup a greenfield project to offer services. I have requested for a Term Loan of 100 lakhs. I have offered 20% Margin Money. Now the Bank is asking for 2:1 Debt Equity Ratio, I didn't understand this, I may not be able to show this in the first year since it is a startup and services, I am starting it in a leased premises. I am requesting the loan for purchase of equipment. How do I convince the bank, help sought. Rest of the ratios are meeting the requirements of the bank.

thanks for the help,

Srinivas

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2 Replies

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 02 October 2013

just when you purchase a house on loan what is expected same thing applies here .This seems to be one of the essential requirement .It seems You have to bring in another 30 lakhs by way of equity else You have to Furnish certain Guarantees to get the Term Loan sanctioned

HK Kaushik (Finance Professional) (21 Points)
Replied 12 October 2013

Any debt and its amount is evaluated from perspective of the enterprise's capability of generating cash so that loan repayment is honoured without invoking the underlined security. Most of time, such debt-equity is arrived based on the above concept. However, banks assess smaller loans under pre-set standard scheme and consider generic Debt-equity ratio alongwith other ratios / parameters.

You need to know what is basis of considering this specific Debt-equity by Bank. If its under a pre-set scheme, then you need to convince Lender, why your business shall earn higher profits than the lender's understanding.