Why asset coverage ratio matters to a first-time founder
The asset coverage ratio gives lenders and founders a rough view of how much asset value supports debt after agreed deductions. It may appear in a lender’s analysis or a loan condition. A falling ratio can limit borrowing or show that lenders have less protection.
Examples of asset coverage ratio
A lender defines available assets as total assets minus non-physical assets and short-term bills other than short-term debt. Dividing $120 million of available assets by $60 million of debt gives coverage of 2.0 times. Another loan agreement may define each part differently.
Common misunderstanding
There is no universal formula. Analysts and loan documents may subtract different bills, exclude non-physical assets or count only certain debt. Values in the accounts may not match sale proceeds. Passing the required ratio does not mean the assets can be sold quickly or at their recorded value.
When to use it
Use the ratio when checking ability to repay debt, negotiating a secured loan or monitoring a loan condition. Follow the exact definition in the agreement, including any averaging, exclusions and valuation rules. Forecast how far you are from the minimum and ask finance and legal advisers to review important calculations.