EBITDA
Earnings Before Interest, Tax, Depreciation and Amortisation. UK lenders' most-used cashflow proxy — both for sizing facilities and for getting the answer wrong on growing SMEs.
Definition
EBITDA measures a company's operating profitability while stripping out three things that vary by accounting and financing choice rather than by business performance:
- Interest (I) — how the business is financed, not how it operates
- Tax (T) — jurisdictional + structural choices
- Depreciation + Amortisation (DA) — non-cash accounting allocations of past asset spend
Two equivalent formulas
Top-down:
Revenue − COGS − OpEx (excl. D&A) = EBITDA
Bottom-up (more common from UK filed accounts):
Operating Profit + Depreciation + Amortisation = EBITDAFor UK SMEs filing under FRS 102 small / micro-entity rules, D&A is in the notes (or missing entirely from micro-entity filings). For the smallest SMEs, EBITDA is typically derived from open-banking-fed cashflow data rather than filed accounts.
How UK alt-lenders use it
Sizing the facility
Leverage cap = max debt the lender will provide as a multiple of EBITDA. Typical 2026 UK ranges:
| Product | Typical leverage cap | Example |
|---|---|---|
| Working-capital term loan (unsecured) | 2–3× EBITDA | £200k EBITDA → £400-600k facility |
| Revenue-based / MCA | 1–2× EBITDA | Lower because revenue volatility already absorbed |
| Asset-backed (kit / vehicles) | 4–6× EBITDA | Asset value backstops repayment |
| Property-secured | 5–10× EBITDA | LTV-driven, not EBITDA-driven primarily |
Sizing the repayment
Debt-service coverage ratio (DSCR) is typically expressed as EBITDA ÷ annual debt service. UK lender minimum: 1.25–1.50 for unsecured working capital; below 1.25 the loan is usually declined or sized down.
The limits — why EBITDA fails for fresh UK SMEs
- Working capital movements excluded. A profitable SME extending its receivables (winning bigger contracts on 60-day terms) shows strong EBITDA but sharply negative operating cashflow — exactly when they need a working-capital loan most.
- Capex excluded. A construction SME with £100k EBITDA may need to reinvest £80k/year in plant. The available debt-service is closer to £20k than £100k.
- Add-back inflation. "One-off costs" added back to EBITDA: founder's salary, "transition" advisor fees, "non-recurring" legal. These often recur. UK alt-lenders develop sector-specific add-back skepticism.
- Useless for negative or zero EBITDA. Most newly-incorporated UK SMEs (Borrowsignal's primary lead population) have no operating history or are pre-revenue. EBITDA-based underwriting doesn't apply — lenders pivot to founder credit + sector-typical assumptions + open-banking data.
- Stale. Filed UK accounts are typically 6–12 months old. EBITDA derived from them describes last year's business. Open Banking data is real-time.
Where Borrowsignal fits
EBITDA-based underwriting is application-time. Borrowsignal sits before that — at the top of the funnel, identifying companies that don't yet have meaningful EBITDA (because they were incorporated this week) but will need credit in the next 90 days. The lender's underwriting on those leads typically uses founder credit + sector-typical revenue assumptions + (later) open-banking-fed cashflow, with EBITDA-based sizing kicking in only at year-2 renewal.
EBITDA vs operating cashflow — pick the right tool
For UK SME lending in 2026, most credit teams use a hybrid:
- EBITDA for sizing the facility (leverage cap, DSCR)
- Open-banking cashflow for serviceability stress-tests + real-time monitoring
- Working-capital cycle (days sales outstanding + days inventory outstanding − days payable outstanding) for sector-fit assessment
Single-metric reliance — EBITDA alone, or cashflow alone — is the single biggest source of UK alt-lender model error.
Related
- Working capital — what EBITDA-based sizing fails to capture
- Open Banking — real-time alternative
- Working capital loan — primary product sized off EBITDA
- UK working-capital pricing benchmarks
Frequently asked
How is EBITDA calculated?
Bottom-up: Operating Profit + Depreciation + Amortisation. Top-down: Revenue − COGS − OpEx (excl D&A). For micro-entity UK SMEs, D&A is often unavailable from filed accounts; lenders derive EBITDA from open-banking cashflow instead.
What EBITDA multiple do UK SME lenders use?
2–3× for unsecured working capital; 1–2× for revenue-based; 4–6× for asset-secured; 5–10× for property-secured. DSCR minimum 1.25–1.50.
What are the limits of EBITDA for UK SME underwriting?
Excludes working capital movements + capex; easily inflated by add-backs; useless for negative or zero EBITDA (most fresh incorporations); stale (based on filed accounts 6-12 months old).
Is EBITDA different from operating cashflow?
Yes — operating cashflow includes working capital changes, inventory, prepayments. EBITDA doesn't. Fast-growing SMEs show strong EBITDA + sharply negative cashflow, the exact moment WC loans are most needed and most risky.