How EBITDA Affects Loan Approval

EBITDA is a widely used proxy for a company’s core operational performance. 
By excluding interest, taxes, depreciation and amortization, EBITDA strips out certain financial, tax or non-cash effects to show how much cash a business may generate.
For lenders, EBITDA is a key metric because it gives insight into whether the business can support debt payments and operating obligations. 

Why lenders focus on EBITDA in underwriting

Lenders care less about just top-line revenue and more about the ability to repay debt. EBITDA helps with that in several ways:

• It shows operating profit before financing and accounting assumptions, so it’s more comparable between companies and time periods.

• It allows calculation of important credit metrics like debt-to-EBITDA ratio and debt service coverage ratio (DSCR), which assess risk.

• It gives lenders an idea of how much cushion a borrower has before debt obligations consume operational cash flow.

• It is used in loan covenants and monitoring: a borrower may be required to maintain a defined EBITDA minimum or ratio.

Key metrics using EBITDA that impact loan approval

Debt-to-EBITDA ratio

This ratio measures how much debt the business has compared to the cash it earns (via EBITDA). The formula is:

A lower ratio suggests a business is less leveraged and thus lower risk to the lender.

Debt Service Coverage Ratio (DSCR)

DSCR measures whether cash flow (often proxied by EBITDA) covers principal and interest payments. For example:

Most lenders prefer DSCR > 1.2-1.3x to indicate sufficient coverage. 

EBITDA growth and stability

Lenders don’t just look at a single year’s EBITDA—they assess trends. If EBITDA is growing steadily and is stable, the business is viewed as more reliable. Fluctuating or declining EBITDA raises red flags.

How EBITDA directly affects your loan approval chances

Here are the concrete ways that EBITDA influences lender decisions:

1. Loan amount sizing: A lender might say: “We’ll lend up to X times EBITDA” (often 2 – 4× or more depending on the industry). For example, a business earning $1 million EBITDA might qualify for $2 - $4 million in debt if other factors check out.

2. Interest rate determination: Higher EBITDA and lower risk → lower interest rate; weak EBITDA or high leverage → higher rate or even declined application.

3. Covenant negotiation: The loan agreement will typically include EBITDA-based covenants (minimum EBITDA, maximum debt/EBITDA) that must be maintained. If you fail those, you might trigger default.

4. Approval vs. rejection: If EBITDA is too low, erratic or declining, lenders may view the loan as too risky and decline.

5. Collateral and guarantees: Good EBITDA can reduce the lender’s reliance on collateral or personal guarantees; poor EBITDA might force stricter terms.

Industries and context matter: “Good” EBITDA is relative

It’s important to understand that what constitutes a “good” EBITDA or healthy ratio depends on the industry, business model, capital intensity, and risk profile.

• A retail business may have thinner margins and lower EBITDA multiples than a SaaS company.

• Capital-intensive industries will have higher depreciation and amortization, so EBITDA may be relatively higher vs net income.

• A seasonal business might have more variability in EBITDA, so lenders may apply more conservative multiples or require higher cushions.

• The size of business also matters—small businesses often face tighter ratios than large corporations with more diversified risk.

As one guide notes: “A high debt-to-EBITDA ratio may signal the company’s debt burden is too heavy.” 

Steps to improve your EBITDA and increase your approval odds

If you’re planning to apply for a loan, here are actionable steps to bolster your EBITDA and loan readiness:

1. Optimize operations to increase core profitability – Reduce unnecessary expenses, streamline workflows, renegotiate vendor contracts.

2. Exclude one-time or non-recurring items (where legitimate) to show a ‘normalized’ or adjusted EBITDA. Lenders often accept adjusted EBITDA that excludes non-recurring charges.

3. Grow revenue in higher-margin areas – Better margin improves EBITDA more than just higher revenue in low margin operations.

4. Manage debt proactively – Don't take on excessive debt that will push your debt/EBITDA ratio too high; aim to keep it within industry norms.

5. Forecast and stress-test EBITDA – Show the lender projections and how EBITDA holds up under conservative scenarios. This builds confidence.

6. Maintain consistent historical performance – If EBITDA has been volatile, include explanation and demonstrate management’s plan to stabilize earnings.

7. Prepare clear financials and be transparent – Provide audited or reviewed statements, disclose add-backs, and work with your accountant to ensure clarity and credibility.

Steps to boost EBITDA before applying for a loan:

1. Trim variable and fixed cost base.

2. Focus sales on higher-margin products/services.

3. Adjust out non-recurring expenses to show normalized earnings.

4. Avoid excessive new debt that raises leverage.

5. Build a forecast showing EBITDA remains stable under a downturn.

Case study examples: Real-world implications

Example A: Company with strong EBITDA

Imagine a manufacturing firm with five years of stable EBITDA at $2 million, debt of $5 million, giving a debt/EBITDA ratio of 2.5x. Lender may view it as low risk, approve based on multiple of say 3x EBITDA → maximum debt ~$6 million. The DSCR also looks good.

Example B: Company with weak/volatile EBITDA

In contrast, a retail service business with EBITDA of only $200 k last year (down from $400 k two years ago), and debt of $1 million (ratio 5x) may be deemed high risk. The lender may decline or approve with very strict covenant, high interest rate or heavy collateral.

Adjusted EBITDA negotiation

In loan documents, the definition of EBITDA can be a negotiation point. For instance, whether certain add-backs (legal settlements, restructuring costs, one-time IT expense) are allowed can materially affect the ratio and thus loan size. Reuters

Common pitfalls and misconceptions about EBITDA in loan underwriting

• EBITDA is not cash flow: Although useful, EBITDA omits real cash-uses such as capital expenditures, working capital needs, taxes, and debt principal repayments. Relying solely on EBITDA gives an incomplete picture.

• No standard definition: “Adjusted EBITDA” can vary widely between lenders and borrowers. Differences in add-backs can skew comparability.

• Industry benchmarks matter: What is acceptable debt/EBITDA in one industry may be unacceptable in another.

• Lenders look beyond numbers: Qualitative factors (management team, customer diversity, economic environment, collateral) also matter.

• Covenants can trigger default even if payments are current: You may be current on loan payments but if your EBITDA falls below covenant threshold, the lender could call default.

How to present your EBITDA story to the lender

Here are actionable tips to present your EBITDA in the best light when seeking a loan:

• Provide at least 3 – 5 years of historical financials so the lender sees trend and stability.

• Prepare a clear calculation of EBITDA and any adjustments (with footnotes) so the lender understands your method.

• Show your debt/EBITDA ratio and DSCR, and explain how you align with industry norms.

• Provide forecasts showing how EBITDA grows or remains stable in projected years, including a downside scenario.

• Be transparent about any non-recurring items you’re excluding from adjusted EBITDA and provide justification.

• Address seasonality, customer concentration or business cyclicality—explain how you manage them so the lender sees risk mitigation.

• Highlight any collateral or guarantees, but emphasize that your EBITDA covers the debt service.

• Use a professional presentation and include internal links to your business plan or investor deck (if you have one), so the lender can see broader context.

Summary 

Understanding how EBITDA affects loan approval is vital for any business owner seeking financing. Strong, stable EBITDA signals operational health and debt-service capability, which boosts your chances of favorable terms. Conversely, weak or volatile EBITDA will raise red flags for lenders.

Focus on improving EBITDA (through higher margins, cost control, normalized add-backs), keeping leverage in check, and presenting a clear and credible financial story to lenders. Doing so increases loan options, lowers interest costs, and positions your business for growth.

Ready to take the next step? Review your latest financials, calculate your current EBITDA and debt/EBITDA ratio, and consider meeting with your accountant or a business finance advisor to prepare for your next loan discussion. 

Get your finances loan-ready and make EBITDA work in your favor!