EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is a widely used measure of a business's underlying operating profitability, stripping out the effects of financing decisions (interest), accounting conventions (depreciation and amortisation), and tax jurisdiction.

Lenders use EBITDA as a key metric when assessing larger structured business loans and commercial mortgages. A common covenant in commercial lending is a minimum EBITDA or a maximum debt-to-EBITDA ratio (for example, total debt must not exceed 3x EBITDA). A business with £500,000 EBITDA and a maximum 3x multiple could borrow up to £1.5 million.

EBITDA is not the same as cash flow - a profitable business on an EBITDA basis can still have poor cash flow if debtors are slow to pay or stock is tied up. Lenders will always look at bank statements and cash flow projections alongside EBITDA when making lending decisions.

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