Picture this: you're sitting across from a loan officer, expansion plans in hand, while they're calculating five numbers that'll determine your business fate. Those busy weekend crowds and stellar reviews don't impress them. They want cold, hard proof you won't default on their money.
The 5 crucial ratios banks examine
Every hospitality loan decision comes down to these financial indicators. Banks use them to separate profitable ventures from potential failures:
- Debt Service Coverage Ratio (DSCR) - can you repay your loan?
- Current Ratio - can you pay your short-term obligations?
- Revenue growth - is your business growing or shrinking?
- EBITDA margin - how much do you really earn?
- Food cost percentage - do you have control over your costs?
💡 Example:
Restaurant with €500,000 annual revenue wants to borrow €100,000:
- EBITDA: €75,000 (15% margin)
- Annual repayment: €20,000
- DSCR: 75,000 / 20,000 = 3.75
Bank's response: excellent, you're earning nearly 4x your repayment needs.
Debt Service Coverage Ratio (DSCR) - The deciding factor
This number reveals everything about your repayment capacity. You'll need at least 1.25, but experienced operators target 1.5 or higher for better terms.
Formula: DSCR = EBITDA / Annual debt service
EBITDA represents your real earnings before interest, taxes, and depreciation. Annual debt service includes your total yearly payments plus interest.
⚠️ Note:
EBITDA isn't your revenue. Subtract every operating cost first: food, wages, rent, utilities, insurance.
Current Ratio - Your cash flow reality check
Banks demand proof you can cover immediate expenses. This ratio weighs what you own (cash, inventory, receivables) against what you owe in the next twelve months.
Formula: Current Ratio = Current assets / Current liabilities
The ideal range falls between 1.2 and 2.0. Drop below 1.2 and you're signaling cash problems. Go above 2.0 and banks question why you're not reinvesting that capital.
💡 Example:
Bistro with these assets:
- Cash: €15,000
- Inventory: €8,000
- Current liabilities: €18,000
Current Ratio: (15,000 + 8,000) / 18,000 = 1.28 - barely acceptable
Revenue growth - Your business momentum
Banks analyze your revenue trends from the past 2-3 years plus future projections. They're searching for growth signals, not warning signs of decline.
Banks expect to see:
- Steady or increasing revenue (minimum: keeping up with inflation)
- Realistic forecasts (overly optimistic projections kill credibility)
- Seasonal patterns you can explain clearly
Revenue drops exceeding 10% without solid explanations raise immediate red flags. Poor revenue tracking alone costs the average restaurant EUR 200-400 monthly in higher interest rates or outright rejections - a mistake I've witnessed destroy countless loan applications.
EBITDA margin - Your profit extraction power
Your EBITDA margin demonstrates how effectively you turn sales into actual profit. Most banks require restaurants to maintain 10-15% margins as their minimum standard.
Formula: EBITDA margin = (EBITDA / Revenue) × 100
💡 Example:
Restaurant generating €400,000 revenue:
- Food cost: €120,000 (30%)
- Staff costs: €160,000 (40%)
- Other expenses: €60,000 (15%)
- EBITDA: €60,000
EBITDA margin: 60,000 / 400,000 × 100 = 15% - solid performance
Food cost percentage - Your control indicator
Food costs show banks if you're running a disciplined operation or losing money through poor management. They view this as a measure of your overall competence.
Target food costs by segment:
- Fine dining: 28-32%
- Casual dining: 28-35%
- Fast casual: 25-30%
- Café/bistro: 25-32%
⚠️ Note:
Calculate food costs using net selling prices (excluding VAT). Menu prices include 9% VAT that skews your real percentages.
How banks score your numbers
Banks feed your ratios into automated scoring systems and compare them against industry standards. They're evaluating:
- Trends: are your numbers improving or deteriorating?
- Consistency: do figures remain stable or fluctuate wildly?
- Peer comparison: how do you stack up against similar businesses?
One weak ratio won't kill your application, but multiple problem areas make approval nearly impossible.
Strengthening weak ratios
Poor numbers don't guarantee rejection. You can improve your position by:
- Increasing your down payment (reduces loan amount, improves ratios)
- Providing collateral (property, equipment)
- Securing personal guarantees
- Adding qualified co-signers
Banks primarily want assurance that you recognize the issues and have concrete plans to address them.
How do you calculate your ratios for the bank?
Gather your financial figures
Get your last 3 annual accounts, plus your most recent monthly or quarterly figures. You need: revenue, all cost items, balance sheet with assets and liabilities.
Calculate your EBITDA
Deduct from your revenue: food cost, staff costs, rent, energy, insurance and other operational costs. Leave out interest, taxes and depreciation.
Calculate your ratios
DSCR = EBITDA / annual repayment. Current Ratio = (cash + inventory + receivables) / current liabilities. EBITDA margin = EBITDA / revenue × 100.
✨ Pro tip
Track your debt-to-equity ratio weekly during the 90 days before loan applications - banks scrutinize this metric intensely, expecting ratios under 2:1 for optimal approval rates. Most operators discover this requirement too late.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
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Frequently asked questions
Which ratio carries the most weight with bank underwriters?
The Debt Service Coverage Ratio (DSCR) drives their decision-making process. This metric directly proves your loan payment capacity. Banks require 1.25 minimum, but reaching 1.5 or higher significantly improves your approval chances and terms.
How do I calculate EBITDA correctly for my restaurant?
Start with your total revenue and subtract all operating expenses: food costs, payroll, rent, utilities, insurance, and other operational costs. Don't subtract interest, taxes, or depreciation - what's left is your EBITDA.
What if my food costs exceed industry standards?
Food costs above 35% trigger major concerns for lenders. This indicates either poor inventory management or pricing issues that threaten profitability. Address this problem before applying for financing, as it signals serious operational weaknesses.
Can seasonal revenue fluctuations damage my loan application?
Not if you can explain them with solid reasoning and historical data. Banks understand hospitality seasonality - they just want evidence you've planned for slow periods and can maintain positive cash flow year-round.
📚 Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
- Warenwetbesluit Bereiding en behandeling van levensmiddelen (2024) — Official source
- WHO — Foodborne diseases estimates (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
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