How lenders calculate your remaining borrowing capacity
The key metric is the debt service coverage ratio (DSCR): your annual net operating income divided by your total annual debt repayments, including the proposed new facility. Most lenders want a DSCR of at least 1.25x to 1.5x, meaning your income comfortably exceeds total debt service with a buffer.
Lenders will ask for a schedule of all existing borrowing, including bank loans, hire purchase agreements, finance leases, director loans, HMRC Time to Pay arrangements, and any other regular financial commitments. The total monthly commitment from all sources is compared against your average net monthly income.
- Debt service coverage ratio (DSCR) of 1.25x to 1.5x is typically required
- All existing borrowing must be disclosed, including off-balance-sheet leases
- Seasonal businesses should calculate DSCR across a full year, not just peak months
- Director loans are assessed differently from third-party debt by some lenders
- Refinancing existing debt can sometimes improve the DSCR by extending terms and reducing monthly commitments
Products that work alongside existing debt
Invoice finance does not increase fixed monthly debt commitments in the way a term loan does. It releases cash from your sales ledger and is repaid dynamically as customers pay. For businesses with existing term loans whose DSCR is already stretched, invoice finance may improve cash flow without adding to the debt service burden.
Similarly, revenue-based finance repays as a percentage of revenue, so in months where revenue falls, the repayment falls proportionally. This flexibility makes it a useful complement to fixed-term borrowing for businesses whose income fluctuates.
Refinancing to create capacity
If your existing debt is restricting access to new borrowing, refinancing can sometimes create headroom. Extending the terms of existing loans reduces monthly commitments and improves DSCR. Consolidating multiple facilities into a single loan simplifies the picture and may reduce overall monthly costs. A broker can model the effect of different refinancing structures on your DSCR and identify whether this creates sufficient capacity for the new borrowing you require.
Frequently Asked Questions
Do I need to disclose all existing borrowing when applying for business finance?
Yes. Failing to disclose existing debt is a material misrepresentation and can constitute fraud. Lenders will typically search credit references and Companies House charges, so undisclosed borrowing is likely to be discovered. Full disclosure, presented in context, is always the correct approach.
Can I get invoice finance if I already have a business loan?
Yes. Invoice finance and term loans are entirely compatible. Invoice finance is secured against your book debts (a separate asset from any security already given under a term loan, assuming the term loan lender does not hold a debenture over book debts). Dual-facility structures are common.
What happens if I take on more debt than I can service?
Over-leveraging leads to missed repayments, default, and potential insolvency. Responsible lenders will decline applications where the DSCR is too tight, but the applicant should also self-assess whether the new repayment is genuinely serviceable before applying.