"Leverage Ratio, Loan to Value Ratio and Debt Service Coverage Ratio are the three important Ratios in analysing "Term Loan Proposals" of Business firms by the Banks. Explain the importance of these three Ratios from the

The Banks rely on Leverage Ratio, Loan to Value Ratio and Debt Service Ratio, while sanction Term Loans to know viability of Business Firm. These three ratios are very important for banks to know the viability of the project for which the business firm required term loan. Bench mark level of these ratios help to assess the feasibility of projects. Leverage Ratio: Leverage ratio is calculated by dividing Total Business Liabilities by Total Business Equity. Leverage Ratio over 4 to 1 would significantly reduce the chances of securing a Bank Term Loan. The basic idea is that lender doesn't want to simply borrow in order to grow the business. Loan to Value Ratio: Loan to Value Ratio is calculated by the Total amount of the loan divided by the appraised value of collateral. Most Banks will require the appraised value of collateral to be higher than the loan amount. The lender is looking at this Ratio to see how much breathing room they have. If the business is to default on the loan and the bank ends up with the collateral, the bank wants to make sure they can sell the collateral for a value high enough to recover the entire balance of the loan. Debt Service Coverage Ratio: This Ratio is calculated by dividing Annual Net Income by Annual Debt Service. Debt Service is a way of saying Term Loan Installment Payments. This Ratio tells the lender how many times could make the loan payment with Net Income. If the firm could make the loan payment 10 times with firm Net Income each year, firm have plenty of Leverage. If only make the loan payments 1.25 times per year, the bank is going to be nervous that if there is any negative downtrend with firm business, firm won't be able to make firm's loan installment payments.