Breakeven Analysis
What does it mean
Breakeven Analysis is the exercise of determining how far revenues, margins, expenses or interest rates can change before a borrower no longer produces sufficient income to service their debts.
Why does it matter
Think of a Breakeven Analysis as how low the limbo bar can go before the business falls down (doesn’t generate enough income to cover their loan payments). The lower the bar can go, the less risk present for the bank. The scenarios used to determine breakeven vary by industry and loan type, but some common ones would include:
- Changes in Revenue
- Changes in Gross Profit Margin
- Change in Occupancy Rate
- Change is Rental Rate
- Changes in Interest Rate
By running these scenarios, you will see how sensitive a borrower’s ability to repay their loan would be.
Other Relevant Terms
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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
