PreCap Logic

The PreCap Decoder

Capital Readiness. Simplified.

50 results

Quick Formula

EBITDA

Revenue - Operating Expenses (before interest, taxes, depreciation, amortization)

Quick view of operating earnings power.

Plain English

Your business’s raw profit before the 'outside world' (taxes, interest, and accounting tricks) gets involved.

Why Lenders Care

It’s the universal yardstick to see if your actual operations are healthy enough to sustain a loan.

Real-World Example

Imagine you made $100k selling coffee. Lenders look at that $100k first, ignoring your specific tax breaks or the interest on your old espresso machine.

Quick Formula

Gross Margin

(Revenue - COGS) / Revenue

Shows how much you keep from each sale.

Plain English

How much money is left over from a sale after you pay for the 'ingredients' of that sale.

Why Lenders Care

Low margins mean you have to sell a massive volume just to survive; high margins mean you have more room to absorb mistakes or rate hikes.

Real-World Example

If you sell a shirt for $20 and it cost $5 to make, your margin is $15. If the fabric price jumps to $10, your margin shrinks, and the lender gets nervous.

Quick Formula

DSCR

Net Operating Income / Debt Payments

Above 1.0 means debt is covered; 1.25 is often stronger.

Plain English

A math test to see if you have enough 'extra' cash to pay back the loan every month.

Why Lenders Care

This is the #1 'Go/No-Go' metric. If your ratio is below 1.25, lenders worry that one bad week will cause a missed payment.

Real-World Example

If your loan payment is $1,000 and your monthly profit is $1,250, your DSCR is 1.25. You have a 25% 'safety cushion.'

Plain English

A 'pinky swear' backed by your personal assets (house, car, savings) that you’ll pay if the business can't.

Why Lenders Care

It gives them a 'Plan B' and ensures you have 'skin in the game.'

Real-World Example

It’s like co-signing for your teenager’s first car; if they stop paying, the bank comes to you.

Quick Formula

Loan-to-Value

Loan Amount / Asset Value

Lower LTV usually means lower lender risk.

Plain English

The percentage of an asset's price that the bank is willing to lend you.

Why Lenders Care

Lenders never want to lend 100% because if the value drops, they lose money.

Real-World Example

You want to buy a $100k warehouse. The bank offers an 80% LTV, meaning they give you $80k, and you must bring $20k of your own 'fuel.'

Plain English

The 'Steady Descent'—scheduling your payments so the loan is killed off bit by bit over time.

Why Lenders Care

It ensures the loan is actually being paid down, rather than just paying interest forever.

Real-World Example

Think of it as a pre-flight descent path. Instead of diving at the end, you gradually lower your altitude (balance) every month until you touch the ground ($0).

Plain English

How much 'bang for their buck' the lender gets if they had to take over your business today.

Why Lenders Care

It measures their risk regardless of interest rates or market trends.

Real-World Example

If a lender gives you $1M and your business makes $100k a year, their 'yield' is 10%. They want to know that yield is high enough to justify the risk.

Plain English

A 6-digit social security number for your industry that tells the government what you do.

Why Lenders Care

Some industries (like restaurants or trucking) are flagged as 'high risk.' If your code is wrong, you might be denied automatically.

Real-World Example

If you’re a 'Consultant' but your code says 'Casino,' you’re going to have a hard time getting a standard small business loan.

Plain English

A public 'dibs' notice filed by a lender against your business assets.

Why Lenders Care

They want to know who else has a claim on your equipment or inventory before they give you more money.

Real-World Example

It’s like a 'reserved' sign on a table. If Lender A has a UCC lien on your truck, Lender B won’t want to use that same truck as collateral.

Plain English

The 'Birth Certificate' of your business.

Why Lenders Care

It proves the business is a legal entity and identifies who actually has the authority to sign for a loan.

Real-World Example

Without this, you're just a person with a hobby; with it, you're a 'Captain' of a registered vessel.

Plain English

Proof that you’ve paid your state fees and filed your paperwork on time.

Why Lenders Care

If you aren't in good standing, your business technically doesn't exist in the eyes of the law, making a loan contract void.

Real-World Example

It’s like having a valid, unexpired pilot's license. No license, no flight.

Quick Formula

Working Capital

Current Assets - Current Liabilities

Short-term liquidity buffer.

Plain English

The 'Walking Around Money' you have to cover day-to-day bills after subtracting what you owe.

Why Lenders Care

It shows if you can handle a 'rainy day' without the business grinding to a halt.

Real-World Example

If you have $10k in the bank but owe $8k in bills next week, your working capital is only $2k. That's a tight squeeze.

Plain English

Evidence that people actually want to buy what you’re selling.

Why Lenders Care

Lenders don't fund 'ideas'; they fund 'proven systems.'

Real-World Example

Showing a lender 100 signed pre-orders for your new product is a POC; telling them your neighbors 'really liked it' is not.

Plain English

A specific 'shopping list' showing exactly where every dollar of the loan will go.

Why Lenders Care

They want to ensure the money is being used to grow the business (e.g., a new oven) rather than just paying off old credit cards.

Real-World Example

'I need $50k for "stuff"' gets rejected. 'I need $42k for a CNC machine and $8k for initial materials' gets respected.

Quick Formula

Debt-to-Equity Ratio

Total Debt / Total Equity

Shows leverage between borrowed and owner capital.

Plain English

A comparison of how much the bank owns of your business versus how much you own.

Why Lenders Care

If you owe everyone else money and have none of your own invested, you’re more likely to walk away when things get tough.

Real-World Example

If you put in $10k and borrow $90k, you are 'highly leveraged.' Lenders prefer to see you putting more of your own chips on the table.

Quick Formula

Burn Rate

Monthly Cash Outflow - Monthly Cash Inflow

How quickly cash runway is shrinking.

Plain English

How much money you are 'breathing out' (spending) each month compared to what’s coming in.

Why Lenders Care

If you spend $5k more than you make every month, a loan is just a temporary bandage, not a solution.

Real-World Example

If you have $50k in the bank and lose $5k a month, your 'runway' is 10 months before you crash.

Plain English

A 'serious interest' note from a potential partner or buyer.

Why Lenders Care

It’s a signal of future revenue that hasn't hit the books yet but is likely coming.

Real-World Example

A big retailer sends you an LOI saying they intend to stock your product if you can increase production. This helps you get the loan for that production.

Plain English

The bank's 'Identity Check' to make sure you are who you say you are.

Why Lenders Care

Federal laws require banks to prove they aren't accidentally helping with money laundering or fraud.

Real-World Example

This is why they ask for your ID, SSN, and home address—it’s the 'TSA Pre-Check' of the banking world.

Plain English

The 'Weight Limit' of how much more debt your business can safely carry without breaking.

Why Lenders Care

This answers your question: 'How much funding are you looking for?' Lenders won't give you $500k if your math shows you can only handle $100k.

Real-World Example

If your 'plane' (business) is already full of cargo, adding more weight (a bigger loan) might prevent you from ever getting off the ground.

Plain English

What you say you make vs. what the bank statements prove you make.

Why Lenders Care

This is the logic behind: 'What proof of income is available today?' Lenders only trust what they can see on a third-party document.

Real-World Example

It’s the difference between telling a doctor you exercise daily and showing them your fitness tracker data. Lenders always bet on the data.

Plain English

The 'Weather Patterns' of your business—when you have high-revenue sunshine and low-revenue storms.

Why Lenders Care

This maps to: 'How consistent is your income month to month?' Lenders want to see if you can still pay the bill in your slowest month.

Real-World Example

An ice cream shop makes 80% of its money in summer. A lender needs to know the shop won't 'starve' in January when the bills are still due.

Plain English

'Bouncing a Check'—trying to spend money you don't actually have in your account.

Why Lenders Care

This addresses: 'Any overdraft in the last 90 days?' Frequent NSFs are a 'Red Alert' signal that a business is in a cash flow crisis.

Real-World Example

It’s like a pilot ignoring the 'Low Fuel' warning light. It tells the lender you aren't monitoring your dashboard closely enough.

Quick Formula

Credit Utilization

Current Revolving Balance / Total Revolving Limit

Lower utilization is typically healthier.

Plain English

How much of your 'Credit Limit' you are actually using right now.

Why Lenders Care

This explains: 'What is your current FICO range?' If you have a $10k credit card and it's always at $9,900, it looks like you are struggling, even if you pay the minimum.

Real-World Example

If you have 5 suitcases but they are all bursting at the seams, you don't have room for anything new. Lenders like to see 'empty space' on your credit cards.

Plain English

A 'Deep Dive' vs. a 'Quick Peek' at your credit report.

Why Lenders Care

Relates to: 'Any credit challenges?' Too many 'Hard' inquiries in a short time can lower your score because it looks like you're desperate for cash.

Real-World Example

A 'Soft Inquiry' is like checking your own pulse. A 'Hard Inquiry' is like a full medical exam that goes on your permanent record.

Plain English

The 'Skin in the Game'—the cash you are personally putting into the deal.

Why Lenders Care

This clarifies: 'Do you have collateral or cash to support the loan?' Lenders rarely fund 100% of a project; they want to see you taking a risk alongside them.

Real-World Example

If we are building a $100k house, the lender wants to see you bring at least $10k of your own money to the table so you don't walk away if the roof leaks.

Plain English

The 'Backup Parachute'—how the bank gets paid if the business suddenly stops making money.

Why Lenders Care

This connects to: 'How will this loan be repaid?' and 'Do you have collateral?' Lenders always want two ways out of a deal.

Real-World Example

Primary source: Your daily coffee sales. Secondary source: The expensive espresso machine the bank can sell if the shop closes.

Plain English

The internal rulebook that details who is in charge, how decisions are made, and what happens if owners disagree.

Why Lenders Care

They need to verify that the person signing the loan docs actually has the legal authority to bind the company to that debt.

Real-World Example

Think of it as the 'Rules of the Cockpit'—if the pilot and co-pilot have a disagreement mid-flight, this document dictates who makes the final call on the route.

Plain English

The legal 'bucket' you chose for your business, which determines your tax rules and how much personal protection you have.

Why Lenders Care

Your structure changes how the lender views your taxes and your personal liability if the business can't pay.

Real-World Example

This is the 'Model of your Aircraft'—a nimble single-engine LLC flies under different regulations and maintenance schedules than a heavy commercial S-Corp airliner.

Plain English

An official 'nickname' for your company if the name on your storefront is different from your registered legal name.

Why Lenders Care

Lenders must ensure that 'The Coffee Nook' is legally the same entity as 'Smith Enterprises LLC' to make the loan contract valid.

Real-World Example

It’s your 'Call Sign'—over the radio, you might call yourself 'Star-Flight,' but your official registration number on the tail is what the tower uses for the paperwork.

Plain English

A unique nine-digit number issued by the IRS to identify your business for taxes.

Why Lenders Care

This is the primary key lenders use to pull your business credit report and verify your tax filings with the government.

Real-World Example

It is your business's Social Security Number—it’s the ID that allows you to open a 'hangar' (bank account) and tracks your 'flight hours' (credit history).

Plain English

A mandatory report that identifies the real humans who own 25% or more of the company or have significant control.

Why Lenders Care

Federal laws require banks to know exactly who they are doing business with to prevent fraud or illegal money movement.

Real-World Example

The 'Manifest'—before takeoff, the authorities need to know exactly who is on the plane and who owns it so they know who is responsible for the mission.

Plain English

A formal document where the owners or board of the company officially vote and agree to take on the loan.

Why Lenders Care

This protects the bank by proving that the entire leadership team is aware of the debt, not just one person acting alone.

Real-World Example

Your 'Mission Authorization'—it’s the written 'green light' from headquarters giving the pilot permission to take on a specific cargo and flight path.

Plain English

A report showing how long your customers are taking to pay their invoices after you've delivered your work.

Why Lenders Care

If your customers are slow to pay, you might run out of cash even if you are making 'sales.' Lenders look for 'quality' customers who pay on time.

Real-World Example

Imagine you’re flying passengers who promised to pay for their tickets after you land. 'Aging' tracks who paid immediately at the gate and who is still making excuses 60 days later.

Plain English

The list of bills your business owes to suppliers and vendors for goods or services you've already used.

Why Lenders Care

High A/P can mean you are 'leaning' on your suppliers to survive. Lenders want to see that you can pay your partners just as reliably as you pay the bank.

Real-World Example

These are the 'Fuel Bills' you haven't paid yet. It’s your tab at the airport; you can’t keep the engines running indefinitely if you aren't settling up with the ground crew.

Plain English

A ratio that shows how many times you have sold and replaced your stock over a specific period.

Why Lenders Care

High turnover means your product is in high demand and you aren't wasting cash on 'dead stock.' Low turnover suggests your money is trapped in unsold goods.

Real-World Example

This is how fast you sell your 'Cargo.' If your plane is sitting on the tarmac full of goods that aren't moving, you’re losing money every hour the cargo holds are full.

Plain English

Fixed costs stay the same every month (like rent), while variable costs change based on how much you produce (like raw materials).

Why Lenders Care

A business with high fixed costs is 'brittle'—if sales drop, the bills don't. Lenders prefer a balance that allows you to cut spending if the market cools down.

Real-World Example

Fixed costs are the hangar rent (you pay it even if you don't fly); variable costs are the fuel (the more you fly, the more you pay).

Quick Formula

Break-Even Point

Fixed Costs / (Price per Unit - Variable Cost per Unit)

Sales level needed to cover all costs.

Plain English

The exact dollar amount in sales you need to reach to cover all your expenses and make exactly zero profit.

Why Lenders Care

It identifies your 'Safety Line.' Lenders want to know how much your sales can drop before you start losing money and can't pay the loan.

Real-World Example

This is the 'Lift-Off' speed. It’s the exact moment you stop losing money on the runway and finally start climbing into the sky.

Plain English

A financial report that summarizes your revenues, costs, and expenses during a specific period (usually a month or year).

Why Lenders Care

This is the primary document lenders use to see if your business is actually capable of making money.

Real-World Example

Your 'Flight Log' for a specific period. It records every bit of altitude gained (revenue) and every drop of fuel burned (expenses) during that segment of the journey.

Plain English

A financial 'snapshot' that shows everything your business owns (assets) and everything it owes (liabilities) at a specific moment in time.

Why Lenders Care

While the P&L shows performance, the Balance Sheet shows health. It tells the lender how much 'weight' the business is carrying and what it’s actually worth.

Real-World Example

A 'Snapshot' of everything you own and owe right now. Think of it as a pre-flight weight and balance check—it tells the pilot if the aircraft is too heavy to fly safely.

Plain English

A life or disability insurance policy on the business owner or a vital employee, where the business is the beneficiary.

Why Lenders Care

If the person running the 'engines' can no longer work, the lender wants to know there is an immediate cash infusion to keep the business alive or pay off the debt.

Real-World Example

Think of this as 'Pilot Insurance'. If the captain is unable to fly, this policy provides the funds to hire a new pilot or safely land the plane so the mission doesn't end in a total loss.

Plain English

Standard business insurance that covers you against common risks like customer injuries, property damage, or lawsuits.

Why Lenders Care

One major lawsuit could wipe out your bank account and make it impossible to pay back your loan.

Real-World Example

This is your 'Shield' against lawsuits. It’s like having a reinforced hull on your aircraft; if you hit some debris on the runway, the shield takes the damage so the core systems (your cash) stay protected.

Quick Formula

Collateral Coverage

Collateral Value / Loan Amount

Assesses how strongly assets back the loan.

Plain English

A comparison of the current market value of your assets (equipment, real estate, etc.) against the total amount of the loan.

Why Lenders Care

Lenders want to see a 'coverage ratio' (often 1.2x or higher) to ensure that if they had to sell your assets, they could easily recover the full loan amount.

Real-World Example

The 'Safety Net' value versus the loan amount. If you are jumping from 10,000 feet, you want a net that is wider than the spot you’re aiming for—just in case things get windy.

Plain English

A legal agreement where one lender agrees to stand 'behind' another lender when it comes to getting paid back.

Why Lenders Care

If you have multiple loans, the primary lender wants to be first in line to get paid if the business is liquidated.

Real-World Example

This is deciding who gets paid first if there's a crash. Imagine an emergency exit—this agreement decides the order of who gets to leave the plane first. The 'Senior' lender is at the front of the line.

Plain English

Financial 'rules of the road' you must follow (like maintaining a certain amount of cash in the bank) to keep your loan in good standing.

Why Lenders Care

It gives the lender an early warning system. If you break a covenant, they can step in and help you course-correct before you actually miss a payment.

Real-World Example

These are the 'Flight Rules' you must follow to keep the loan. As long as you stay within the assigned 'altitude' (financial ratios), the tower won't interfere with your flight path.

Plain English

The upfront service fee a lender charges to cover the costs of processing and 'building' your loan.

Why Lenders Care

Underwriting a loan takes time, technology, and experts; this fee ensures the lender covers their administrative costs before the first interest payment ever arrives.

Real-World Example

Think of this as the 'Ticket Price' for processing the loan—even if you have the fuel ready, you still have to pay the ground crew and the airport to get your flight on the official schedule.

Plain English

A fee some lenders charge if you pay back the entire loan significantly earlier than the agreed-upon schedule.

Why Lenders Care

Banks make their profit from the interest you pay over time; if you pay early, they lose that expected income and charge this fee to compensate for the lost 'interest flight time.'

Real-World Example

This is the 'Early Landing Fee'—the airport was expecting your business for a long-duration stay, so they charge you extra for taking up a slot and then leaving before they could collect the full parking fees.

Plain English

The base interest rate that commercial banks charge their most stable customers, which serves as the 'starting line' for almost all other interest rates.

Why Lenders Care

This is the universal benchmark; most small business loans are priced as 'Prime + X%,' meaning your rate goes up or down depending on what the Federal Reserve decides.

Real-World Example

The 'Base Altitude' for interest rates set by the Fed—every plane in the sky flies at a different height based on its weight and engine, but everyone starts measuring their altitude from the same sea level (the Prime Rate).

Plain English

A short-term, temporary loan designed to cover immediate costs until you can secure permanent, long-term financing.

Why Lenders Care

These are higher risk because the 'exit strategy' (how they get paid back) usually depends on another loan coming through later.

Real-World Example

A 'Short Flight' to get you to a bigger destination—you take a small 'hop' from a local airfield to reach a major hub airport where your massive, long-haul international flight is waiting for you.

Plain English

A flexible 'revolving' loan that lets you pull out exactly the amount of cash you need, whenever you need it, and you only pay interest on the amount you’re currently using.

Why Lenders Care

It proves the business is proactive about cash flow; having a 'safety tank' available shows you won't crash if a single customer is late with a payment.

Real-World Example

An 'On-Demand Tank' you only use when needed—instead of carrying the heavy weight of a massive loan all the time, you have an auxiliary tank on the wing that you only tap into if the main engine gets thirsty.

Plain English

An advance where a company gives you a lump sum of cash today in exchange for a fixed percentage of your future daily credit card sales.

Why Lenders Care

While fast, MCAs are often very expensive and can drain your daily cash flow quickly, which is a major 'Red Alert' for traditional banks considering you for a standard loan.

Real-World Example

Selling a piece of 'Future Cargo'—it’s like selling the tickets for next month’s flight today just to pay for this morning’s fuel; it gets you into the air now, but your next journey will be much less profitable.