The loan life coverage ratio (LLCR) is a valuable metric that can be used to evaluate borrowing firms that are looking to secure a loan. It is an important indicator of the soundness of the company’s financial position and its ability to repay the loan.

LLCR is typically calculated by dividing the estimated future cash flows by the outstanding debt obligations of the company. Normally, cash flows include operating income, depreciation, amortization, and other such items. The resulting ratio is known as the loan life coverage ratio, which typically ranges from 1.5 to 4 and indicates the strength of the borrowing firm.

A higher loan life coverage ratio is generally considered to be more favorable by lenders since a higher ratio indicates that the company has sufficient cash flow for servicing its existing loans and for paying off its future obligations as well. A lower loan life coverage ratio will often result in lenders finding it difficult to extend lending to the company.

The loan life coverage ratio (LLCR) is also sometimes referred to as the repayment buffer ratio. This is because it helps to determine the extent of a firm’s financial security, or the extra cash beyond what is owed that can be utilized towards repaying the borrowed money.

It is important to consider that the loan life coverage ratio (LLCR) alone is not a standalone measure, and should be evaluated in relation to other existing capital ratios. Values for the LLCR are not necessarily absolute and can vary depending on the specific lender and the nature of the loan.

Overall, the loan life coverage ratio (LLCR) is a valuable ratio that provides insight into a company’s financial position and its ability to service its existing loans and pay off its future obligations. It is a good measure to consider when evaluating the potential of a borrowing firm.