Business Borrowing Capacity Assessment: ICR, DSR and EBITDA Multiples Explained

Lenders use three core metrics to assess your business borrowing capacity.

• The Interest Cover Ratio shows whether you can service debt interest.
• The Debt Service Ratio reveals if you can meet total repayment obligations.
• EBITDA multiples provide a third lens for capacity assessment.

Understanding these ratios helps you prepare stronger loan applications and manage covenant requirements effectively.

Interest Cover Ratio: Measuring Interest Payment Capacity

The Interest Cover Ratio (ICR) measures your business's ability to pay interest on outstanding debt. Lenders calculate this by dividing your earnings before interest, tax and other costs by total interest expenses.

For example, if your business generates $946,000 in EBITDA and pays $85,000 in annual interest:

Total EBITDA ($946,000) ÷ Total Interest ($85,000) = 11.13

A ratio below 2.0 signals potential difficulty meeting interest commitments, particularly if future income reliability is uncertain. Most commercial lenders prefer seeing ratios above 2.5 to 3.0 for new lending.

Note that depreciation and amortisation are typically excluded from this calculation, focusing on actual cash generation rather than accounting profits.

Let's discuss your options. Book a Strategy Session with Key Choice Lending.

Debt Service Ratio: Total Repayment Assessment

The Debt Service Ratio (DSR) assesses your business's capacity to repay all debt obligations, including both interest and principal components.

Using the same business example:

Total EBITDA ($946,000) ÷ Total Repayment Obligations ($760,000) = 1.24

A ratio of 1.0 or lower indicates negative cash flow after debt servicing. The acceptable minimum depends on income quality and certainty. Established businesses with predictable revenue streams may operate closer to 1.0, while newer ventures typically need higher ratios.

The gap between DSR and ICR highlights the impact of principal repayments. When strong amortisation is required, this gap becomes particularly significant.

EBITDA Multiple Method: Capacity Through Earnings

The EBITDA multiple method applies predetermined limits to adjusted earnings to determine borrowing capacity. This approach suits service businesses where consistent EBITDA is evident and tangible security is limited.

For example:

Total EBITDA ($946,000) × Maximum Multiple of 3.0 = $2,838,000 (Indicative Borrowing Capacity)

Multiples typically range from 2.0 to 4.0, depending on industry, business stability, and lender appetite. Professional services firms often achieve higher multiples than asset-heavy industries.

This method works best when businesses demonstrate consistent earnings patterns over multiple years, subject to lender assessment and individual circumstances.

Understanding Loan Covenants and Performance Ratios

Covenants are restrictions or requirements that lenders impose to monitor borrower performance. These can be quantitative or qualitative, positive or negative. Understanding covenant structures prevents breaches that could trigger default conditions.

Typical quantitative covenants include:

• Debt-to-EBITDA Ratios: Measure total debt against earnings capacity
• Interest Coverage Requirements: Minimum ICR thresholds throughout the loan term
• Debt-to-Equity Ratios: Balance sheet leverage limitations
• Accounts Receivable Turnover: Sales divided by receivables, measuring collection efficiency

EBITDA Minimums: For example, "The aggregated actual EBITDA must be $450,000 for the six months ending 31 December and $900,000 for the twelve months ending 30 June."

Qualitative Covenant Considerations

Qualitative covenants may include:

• Purchase Limitations: Restrictions on major asset acquisitions without lender consent
• Asset Maintenance: Requirements to service and maintain business assets
• Dividend Controls: Limits on distributions, such as "distributions must not exceed 100% of net profit after tax"

Regular covenant monitoring and compliance demonstrates strong business management to lenders.

Preparing Your Borrowing Capacity Assessment

Accurate financial records form the foundation of capacity assessment. Lenders examine historical performance, typically requiring two to three years of financial statements plus current management accounts.

Key preparation steps include:

• Ensuring EBITDA calculations exclude one-off items and non-recurring expenses.
• Maintaining detailed records of debt obligations, including interest rates and repayment schedules.
• Preparing realistic cash flow projections that demonstrate sustainable debt servicing.

Your mortgage broker can help preserve

Book a Strategy Session. Make the Move.

Key Choice Lending has access to 72+ lenders and has supported Australian borrowers through more than $1 billion in transactions. Founder Matthew Clark is a two-time Amazon bestselling author and Better Business Award winner. Book a Strategy Session - no obligation, focused on your situation.