Finance term
EBITDA
Also known as: Earnings Before Interest Taxes Depreciation Amortization
Definition
EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for a business's operating cash-generating capacity. Lenders use EBITDA to calculate Debt Service Coverage Ratio (DSCR) and assess whether the business generates enough cash flow to service proposed debt.
Detailed explanation
EBITDA removes non-cash charges (depreciation, amortization) and financing structure effects (interest, taxes) from net income to produce a picture of the business's core operating profitability. The formula: Net Income + Interest Expense + Tax Expense + Depreciation + Amortization = EBITDA.
For lenders underwriting a business term loan or SBA loan, EBITDA serves as the numerator in DSCR math. Annual debt service (proposed new loan payment + existing debt obligations) is compared to EBITDA: DSCR = EBITDA / Annual Debt Service. A lender requiring 1.25× DSCR on a loan with $120K annual debt service needs to see at least $150K EBITDA.
EBITDA has a well-known limitation: it's not the same as free cash flow. Capital-intensive businesses (manufacturing, construction) have high depreciation charges that represent real economic wear-and-tear — stripping them out can overstate actual cash available for debt service. Lenders for asset-heavy businesses often run both EBITDA and a 'cash EBITDA minus capex' metric.
The FASB and SEC do not define EBITDA as an official GAAP metric (https://www.sec.gov/divisions/corpfin/guidance/nongaaplibrary.htm). It is considered a non-GAAP measure, and different companies define it slightly differently. For SBA underwriting, the SBA SOP 50 10 framework references EBITDA-based analysis in its cash flow analysis requirements.
◈ Worked example
- Net income $150K + Interest $20K + Taxes $30K + Depreciation $40K + Amortization $10K = EBITDA $250K
- EBITDA $250K / Annual Debt Service $180K = DSCR 1.39 — comfortable for most lenders
- Manufacturer with EBITDA $400K but annual capex of $200K → adjusted EBITDA minus capex = $200K; lender may use the lower figure for DSCR
Common questions
The most-asked questions about EBITDA — answered straightforwardly.
Why do lenders use EBITDA instead of net income? +
Net income is affected by interest structure (high debt artificially lowers it), tax planning, and non-cash accounting charges. EBITDA normalizes for these, giving the lender a cleaner view of operating cash generation regardless of how the business is currently financed or structured for taxes.
Is EBITDA the same as cash flow? +
No. EBITDA excludes capital expenditures, changes in working capital, and debt repayments — all of which affect actual cash available. Free cash flow = EBITDA minus capex minus changes in working capital. For capital-light service businesses, EBITDA and free cash flow are close. For manufacturers or contractors with heavy equipment needs, the gap can be large.
Where does EBITDA appear on financial statements? +
EBITDA isn't a line item on GAAP financial statements — it's calculated from the income statement and notes. Net income is on the P&L; depreciation and amortization appear either on the P&L or in the cash flow statement (under operating activities). Your accountant or CFO can produce an EBITDA schedule from your financials as part of a loan package.
Further reading
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