What is EBITDA, and how do lenders use it?

What EBITDA stands for

EBITDA is short for Earnings Before Interest, Taxes, Depreciation and Amortisation. It takes your profit and strips out four costs that say more about how the business is financed, taxed or accounted for than about how well it trades:

• Interest depends on how much you have borrowed, not on how well you trade.
• Tax depends on your structure, your reliefs and your year end.
• Depreciation is an accounting charge that spreads the cost of equipment, vehicles and fit-out over their working life. No cash leaves the business when it is charged.
• Amortisation does the same for intangible assets such as goodwill, licences or software.

What is left is a rough measure of the cash the business generates from trading. That is the pot a mortgage would be paid from, which is why lenders care about it.

How to calculate EBITDA

Everything you need is in your profit and loss account. Depreciation and amortisation are usually listed in the notes to the accounts or the fixed asset schedule; your accountant can point to them in a minute.

EBITDA margin

EBITDA margin is EBITDA as a share of turnover: EBITDA ÷ turnover × 100. In the example, £130,000 ÷ £1,200,000 is a margin of about 10.8%.

What counts as a good margin varies hugely by sector: a wholesaler might run on a few per cent, a professional services firm on far more. Lenders are more interested in the trend. A margin that holds steady or grows over three years tells them the business can absorb a rise in costs, including a rise in interest rates.

EBITDA vs net profit

	Net profit	EBITDA
What it is	What is left after every cost, including interest, tax and depreciation	Profit before those four items
What it shows	What the owners actually earned	The cash the trading generates
Who leans on it	Shareholders, HMRC	Lenders, buyers, valuers

Lenders prefer EBITDA because they are about to change your interest bill. They want to know how much cash the trading throws off before any borrowing, so they can see whether it will cover their loan. The weakness of EBITDA is that equipment does wear out and tax does have to be paid, so more cautious lenders deduct tax and essential capital spending before running their test.

Adjusted EBITDA: the figure lenders actually use

Lenders rarely take EBITDA straight from the accounts. They adjust it so it reflects how the business will look once the new loan is in place. The most common adjustments:

• Add back rent you will stop paying once you own the premises. For an owner-occupier buying their own building, this is often the biggest adjustment.
• Add back genuine one-off costs, such as a legal dispute, a relocation or flood damage.
• Deduct a realistic salary for directors if they take most of their pay as dividends, so the profit isn't flattered.
• Deduct one-off income that won't come again, such as a grant, an insurance payout or the profit on selling an asset.

Keep evidence for every add-back: the lease, the invoices, a short letter from your accountant. An add-back you can't prove is usually ignored, and that can knock tens of thousands off what you can borrow.

How a lender turns EBITDA into a loan

1. Start with adjusted EBITDA.
2. Divide it by the cover the lender wants, typically 1.25 to 1.5. That gives the most the business can pay towards debt each year. (This is the debt service coverage ratio.)
3. Take off the payments on any debts you are keeping, such as vehicle or equipment finance.
4. Turn what is left into a loan amount at the lender's rate and term.
5. Cap it by loan-to-value: typically 70% to 75% of the property's value for an owner-occupier.

To see how the monthly payment itself is worked out, read how commercial mortgage repayments are calculated. To run your own figures, use the how much can I borrow calculator.

When EBITDA sets the property's value too

For trading businesses such as pubs, hotels, restaurants, care homes, nurseries and petrol stations, the building and the business are often valued together as a going concern. The valuer works out the profit a reasonably competent operator could expect to make (they call it fair maintainable operating profit, which is close to EBITDA) and applies a multiple based on recent sales of similar businesses.

That means EBITDA drives both sides of the sum: the value the lender lends against and the profit that has to cover the payments. A year of falling profit can cut the valuation and the borrowing at the same time. Buying a business with its premises.

Getting your EBITDA ready before you apply

1. Gather the last two or three years of filed accounts and up-to-date management accounts for the current year.
2. Ask your accountant for a one-page reconciliation from profit to EBITDA to adjusted EBITDA, with each add-back explained.
3. Have the evidence for each add-back ready to send.
4. Be ready to explain any dip in profit, and show what has changed since.
5. List every debt the business is paying, with the monthly payment and end date.

An adviser can run these figures against several lenders' tests before you apply, so you know where you stand. Speak to an adviser.

A note on the numbers. Rates, loan-to-value limits, fees and criteria are typical figures at the time of writing (2026). Commercial lending is priced case by case, so your own terms depend on the property, the business, the tenant and you. This is information, not advice, and not an offer of finance.