The 8 financial indicators banks analyse before approving credit

Applying for bank financing is a critical moment for any SME. Yet many business owners enter that conversation without understanding what the bank actually evaluates — and miss opportunities due to lack of preparation, not lack of merit. Portuguese banks follow fairly predictable criteria. If you know what they are and prepare your financial information accordingly, you significantly increase your chances of approval.

The 8 indicators banks analyse

1. 1

   EBITDA

   Earnings before interest, taxes, depreciation and amortisation

   Banks' preferred indicator of a company's ability to generate operating results. It shows how much the business produces before financial and accounting effects. Banks want to see a positive and, ideally, growing EBITDA.

2. 2

   Debt ratio

   Total Debt / Total Assets

   Measures the degree of dependence on external capital. A ratio above 70–80% is generally seen as risky. Banks prefer companies with a balanced capital structure between equity and debt.

3. 3

   Equity ratio

   Shareholders' Equity / Total Assets

   The inverse of the debt ratio. Measures how much of the assets are financed by equity. Banks typically require a minimum equity ratio of 20–25%. Below that, the company is considered undercapitalised.

4. 4

   Debt service coverage ratio

   EBITDA / Annual Debt Service

   Measures whether the company generates enough results to service its debt. A ratio below 1.2x is a warning sign — it means the company barely covers its existing debt obligations.

5. 5

   Working capital

   Current Assets − Current Liabilities

   Indicates whether the company has sufficient short-term resources to cover its short-term obligations. Negative working capital is a major red flag for any bank.

6. 6

   Days Sales Outstanding and Days Payable Outstanding

   Banks analyse receivables and payables terms. If you collect in 90 days but pay suppliers in 30, you need more working capital — which can directly affect credit approval.

7. 7

   Revenue and its trend

   Banks don't just look at current revenue — they analyse the trend over the last 3 years. A company with consistent revenue growth is seen as less risky than one with erratic or declining figures.

8. 8

   Banking incidents and credit register

   Before approving any credit, the bank checks the central credit register. Overdue debts, defaults or excessive use of existing credit lines all weigh negatively in the assessment.

How to prepare before talking to the bank

• Organise your financial documentation

  Have your financial statements for the last 3 years ready, updated and audited where applicable. Include the balance sheet, income statement and cash flow statement.

• Prepare a business plan

  Explain why you need the financing, how you will use it, and how it will generate returns. Banks finance plans, not wishes.

• Know your numbers

  If the account manager asks about your EBITDA or your debt ratio, you should be able to answer without hesitation.

• Anticipate objections

  If you have a weak ratio, prepare the justification and your plan to improve it. Transparency builds trust.

• Present realistic projections

  Overly optimistic projections destroy credibility. Present conservative scenarios and demonstrate that even in the worst case you can service the debt.