Use the proposed repayment schedule
Identify drawdown dates, interest assumptions, principal repayments, fees and any final payment. Separate existing borrowing from proposed facilities and include commitments that remain after refinancing. The model should follow the terms under discussion rather than a generic repayment calculator.
Mark what is indicative and what has been agreed. A lender can change structure or conditions during assessment. Keep the model version aligned with the proposal so management does not assess affordability using an obsolete payment profile.
Define the cash measure before using a ratio
Debt service coverage can be calculated differently across facilities. Ask how the lender defines the numerator, debt payments and any adjustments. Do not assume EBITDA is the cash available after tax, maintenance investment and working capital.
Reconcile the proposed definition to the model and relevant accounts. A covenant test and an internal liquidity assessment are different tools. Passing an annual ratio does not mean the company has enough cash on every payment date.
Worked example: annual comfort, monthly pressure
A hypothetical business expects £180,000 of cash before £120,000 annual debt service. That suggests 1.5 times coverage using those simplified definitions. If receipts are seasonal but repayments are monthly, it may still encounter an earlier cash shortfall.
Model the opening cash, each receipt and payment, and the low point. The example does not establish a safe borrowing level or a lender threshold. It shows why the payment schedule and operating buffer matter alongside aggregate coverage.
Build a downside that reflects the business
Identify a plausible stress such as delayed collections, a customer loss, margin pressure or slower acquisition integration. Connect the associated costs and timing. Avoid assuming every cost can be cut immediately when revenue falls.
Show the cash result before mitigation, then separately model actions management could take. State who must agree and how long they take. A proposed supplier extension is not available cash until its practical and contractual position is understood.
Test headroom and review triggers
Identify the point where forecast cash or a relevant covenant becomes constrained. Set management review triggers in advance, such as material debtor delays or trading below an agreed level. These triggers should fit the business and facility rather than an invented universal rule.
If the case is fragile, assess alternatives with appropriate advice: a different funding amount, phased spending or a different structure may change the result. Include costs and risks. Do not treat refinancing as guaranteed when it has not been secured.
Reconcile the downside with proposed protections
For each mitigation, record whether it is within management’s control and when it can affect cash. A planned action may be sensible without being available soon enough to meet the next payment. Retain the unmitigated case until implementation is supported, and review the downside again if proposed facility terms change.
| Area | Evidence to examine | Question to resolve |
|---|---|---|
| Collections | Customer confirmation and follow-up responsibility | Is earlier payment agreed or merely requested? |
| Cost action | Contractual notice, implementation and cash effect | Can the saving occur before the repayment date? |
| Funding | Approved facility and drawdown conditions | Is the money available under the stressed circumstances? |
Prepare a transparent lender discussion
Present the borrowing purpose, repayment logic, assumptions and downside together. Explain information gaps and existing obligations. Security, guarantees and legal conditions require careful review with the relevant professionals.
Consult EFC can discuss financial modelling and funding preparation within an agreed scope. We do not promise approval, lender terms or that borrowing is suitable. Begin with the business need, broad amount and timing; detailed documents can follow through an agreed channel.
Your preparation checklist
- Use actual proposed drawdown and repayment dates.
- Reconcile coverage definitions to the cash model.
- Test seasonal receipts and connected downside cases.
- Separate confirmed mitigations from hoped-for actions.
Frequently asked questions
Is there one safe debt service coverage ratio?
No universal figure determines suitability. Definitions, lender requirements, business risk and cash timing vary.
Can EBITDA be used as repayment cash?
It may be a starting measure, but tax, working capital, investment and other cash movements need consideration.
Does this work guarantee loan approval?
No. Lenders make their own assessment of the business, evidence, security, risk and proposed terms.
Sources and scope
This is general preparation guidance. Worked examples are original hypothetical illustrations, not client outcomes, market multiples or individual advice. Agree the purpose, evidence and scope before commissioning professional work.
Professional background: ICAEW technical resources. These links provide context and do not imply endorsement, assurance or compliance for an individual engagement.
Explore the related questions
Discuss the decision with Consult EFC
Tell us the decision, approximate timing and the information available. We will discuss suitability, scope and fees before work begins. Please arrange a suitable channel before sharing confidential documents.