Capacity.
The question is not how much you can get. It is how much the business can carry, and coverage is how a lender decides.
The instrument
What it can carry.
Not how much you can get. Coverage is the ratio a lender actually underwrites to, and it is the number that decides whether a facility helps or hurts.
- Cash available for debt service
- $240,000
- Service on the new facility
- $104,364 / yr
- Total annual service
- $164,364 / yr
- Largest facility that still clears
- $505,923
Coverage of 1.46x on the inputs shown.
Coverage is cash available for debt service divided by total annual debt service. The 1.25x floor is a common commercial underwriting minimum, not a rule, and it varies by lender, sector and collateral. New service is modelled on a five year amortising facility at 11 percent. Illustrative only. Every real file is underwritten on its own numbers.
Assumptions and limits.
An instrument that hides its assumptions is a sales tool. These are the ones this uses.
What it assumes
- Cash available for debt service is taken as revenue multiplied by net margin.
- The new facility is modelled as a five year amortising facility at 11 percent.
- The 1.25x floor is a common commercial underwriting minimum.
- Existing debt service is entered as an annual figure.
What it cannot tell you
- Real underwriting adjusts cash flow for owner compensation, one-off items, depreciation and add-backs. This does not.
- Coverage requirements vary by lender, sector, collateral and facility type. Some require more than 1.25x, a few accept less.
- It does not model seasonality, customer concentration, or a covenant package.
- Clearing the ratio here does not mean a funding source will approve, and failing it does not mean none will.
Educational only. This instrument is a teaching tool, not advice, not an offer, and not a quotation. It models one set of assumptions and cannot account for your circumstances. Figures are illustrative. Any real transaction is underwritten on its own facts by the funding source.
Find out whatit can carry.
Coverage is one input. What the capital is for, and whether it is the right instrument, is the rest of the conversation.