Cover ratios and metrics
EBITDA
Earnings before interest, tax, depreciation and amortisation. The cash-flow figure UK lenders use as the numerator for DSCR on owner-occupier commercial mortgages.
EBITDA is earnings before interest, tax, depreciation and amortisation. On UK owner-occupier commercial mortgages it is the cash-flow figure a lender plugs into the DSCR test. Get this number right, get sized correctly. Get it wrong and the heads of terms either over-promises or under-delivers.
How lenders calculate it
Standard textbook EBITDA is operating profit (profit before interest and tax) plus depreciation plus amortisation. UK commercial mortgage lenders normalise it further before testing DSCR. Typical adjustments:
- Add back owner remuneration above market rate (where the borrower is paying themselves a 200,000 salary on a job that costs 70,000 to hire externally).
- Add back one-off costs (legal disputes, redundancy, relocation).
- Add back non-cash directors’ loan write-offs.
- Strip out non-recurring revenue (a one-off insurance recovery, a single large contract that has now ended).
- Average the last three years rather than relying on the most recent year, especially in cyclical sectors.
A worked broker example
A Leeds owner-managed engineering business buying its trading freehold. Filed accounts show:
- Year 1: Operating profit 180,000, depreciation 35,000
- Year 2: Operating profit 220,000, depreciation 38,000
- Year 3: Operating profit 195,000, depreciation 42,000
Three-year average EBITDA is 236,667. The owners take a 120,000 salary; the lender accepts that as market-rate so no add-back. A 1.5 million loan at 6.5% interest-only costs 97,500 per year. DSCR is 2.43x, which clears the lender’s 1.30x threshold with significant headroom.
Watch for the proforma trap
Owners frequently push for a forward-looking proforma EBITDA, especially when a recent contract win is not yet in the filed accounts. UK clearing banks (Lloyds, NatWest, Barclays, Santander) almost never accept proforma adjustments above 10 to 15% of historic EBITDA. Specialist lenders (Shawbrook, InterBay Commercial) are slightly more flexible on this if the contract is signed and counterparty-strong.
EBITDA versus net profit
Net profit is post-interest, post-tax, post-depreciation. It is too small to use as a debt-service numerator. EBITDA strips out the items that distort comparison across deals and across years.