Gross Margin
The percentage of revenue retained after deducting direct costs of goods or services sold, before overheads.
Gross margin is calculated as (Revenue - Cost of Goods Sold) / Revenue, expressed as a percentage. A business with £1,000,000 revenue and £600,000 cost of goods has a gross margin of 40%. It represents how much of each pound of sales remains to cover overheads and generate profit.
Lenders use gross margin alongside EBITDA and net profit to assess the quality of a business's earnings. High gross margins (common in software, professional services, and branded goods) indicate pricing power and more resilient profitability. Low gross margins (common in commodity trading, distribution, and construction) mean that small revenue fluctuations have a larger proportional impact on profit.
For invoice finance, gross margin affects the quality of the debtor book assessment. Businesses with very low gross margins may face tighter concentration limits or lower advance rates, as the lender is more cautious about the underlying trading viability.
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