EBITDA Is Not Cash: What Commercial Lenders Really Need to See

EBITDA is often used as a shorthand measure of operating performance. It can be useful, particularly when comparing businesses with different depreciation policies or financing structures. But it does not show the cash available to pay interest and principal. A company can report positive EBITDA and still experience a cash shortfall, and growth can intensify that problem.

The bridge from EBITDA to cash

A lender needs to understand the movement from reported earnings to cash flow available for debt service. That normally requires a clear bridge for:

• Working capital: growth in receivables and inventory can absorb cash even when revenue and profit rise.
• Capital expenditure: equipment, fit-out and technology costs may be essential to maintain or expand operations.
• Tax and statutory payments: VAT, PAYE, corporation tax and equivalent liabilities have fixed timing consequences.
• Existing finance: leases, invoice finance, merchant cash advances, shareholder loans and other debt must be included.
• One-off and recurring adjustments: an EBITDA add-back should be specific, supported and genuinely non-recurring.

What bank statements can reveal

Management accounts show an accounting view of the business. Bank statements help test how that view translates into cash. They may reveal late customer receipts, returned payments, persistent low balances, director transfers, unrecorded finance costs or payments to tax authorities. The purpose is not to treat every unusual transaction as a problem, but to understand its commercial basis.

Debt service should be modelled monthly

Annual forecasts can conceal a cash deficit that appears and disappears within the same financial year. A monthly model allows the timing of receipts, costs, drawdowns, interest, fees, principal repayments and covenant tests to be considered properly. The model should identify the lowest cash point and the headroom above it.

Use a credible downside case

A downside case is not simply the base case with every figure reduced by ten per cent. It should test the variables that genuinely threaten liquidity: delayed mobilisation, lower sales conversion, customer loss, margin pressure, cost overruns, slower collection or a delayed exit. The analysis should show when a covenant would be breached or cash would run out, and what management could realistically do in response.

Review your financial model. Send Charter HCP a high-level summary of the business, proposed transaction, funding requirement and intended repayment or exit, and a member of the team will confirm whether the opportunity falls within Charter HCP's scope.