How the Debt Capacity Calculator works

What the calculator estimates

Debt capacity is the maximum amount a business can borrow while still servicing the debt comfortably from its cash flow and the security its assets provide. This calculator estimates it by sizing asset-based facilities against your balance sheet and term loans against your after-tax operating profit.

The results show:

• Debt capacity: the total of the six facilities, in millions of pounds, with a range between the whole millions either side of it.
• Available increase: debt capacity less the existing debt you enter. If existing debt is already at or above debt capacity, this is zero.
• Cash flow cover: after-tax operating profit divided by the total annual cost of servicing all six facilities (interest plus scheduled capital repayments).
• Gross leverage: debt capacity divided by operating profit (EBIT).
• A facility-by-facility breakdown.

The inputs you provide

About the company

• The company, found through a Companies House search.
• Its sector. Sector affects the invoice discounting advance rate, because lenders lend less against debtors in some sectors.
• Whether it is backed by private equity. This affects how much of the term debt can be structured as a bullet loan.

Financial figures

• Turnover and operating profit (EBIT).
• Balance sheet items: property, fixed assets, stock and trade debtors.
• Optionally, the same figures for a business you plan to acquire. The calculator combines them with your own.
• Optionally, assets or property you plan to buy.
• Existing debt: invoice discounting, asset finance, term debt and other debt. Existing debt does not reduce the facilities themselves; it is subtracted at the end to show the available increase.

Most of these figures are in a company's latest statutory accounts or management accounts.

How each facility is sized

Asset-based lenders lend a percentage of the value of the asset that secures the loan (the "advance rate"). Cash-flow lenders lend what the business's profits can repay. The calculator follows the same split.

The affordability test

The term loans are sized last, from whatever cash flow is left. The steps are:

1. Cash available for debt service. Operating profit (EBIT), including any acquisition, less tax at a default corporation tax rate.
2. Apply a cash-flow cover target. Lenders want profits to exceed debt payments by a margin. The cash available is divided by a target cover ratio, which leaves headroom between profit and debt payments.
3. Service the asset-based facilities first. The annual interest and capital repayments on the mortgage, invoice discounting, hire purchase and stock facilities are deducted. Interest is a base rate plus a margin for each facility type (hire purchase is priced on its margin alone). The mortgage and hire purchase repay over fixed terms.
4. Size the term loans from what is left. The remaining annual debt service supports an amortising term loan, repaid over a fixed term. For private-equity-backed businesses, and for other businesses above an operating-profit threshold, part of the term debt is structured as a bullet loan repaid at the end. Because a bullet loan needs only interest payments until it is repaid, the same cash flow can usually support more debt.

If the asset-based facilities alone use up all the cash available, the term loans are zero.

Default assumptions

The calculator applies standard market assumptions for tax, the base rate, advance rates, margins, repayment terms, the cash-flow cover target and the bullet-loan rules. They are defaults, not quotes, and some are time-sensitive (the base rate in particular). Once you have entered your company details you can review the assumptions in the calculator's Advanced Assumptions panel (tax, the base rate, the property, fixed asset and new asset advance rates, facility margins, repayment terms, the cover target and the bullet-loan rules), change them and watch the estimate update. Two rules are not in the panel: stock finance applies only when combined stock is at least £2 million, at a fixed 33% advance rate capped at the invoice discounting amount, and the invoice discounting advance rate is set by your sector.

Limitations

• The estimate is indicative and for information only. It is not financial advice, an offer of finance or a guarantee that any lender will lend.
• Real lending decisions depend on detailed due diligence, credit assessment and each lender's own criteria, including trading history, the quality of the assets and of the debtor book, and security and covenant terms.
• The model uses one year of figures. It does not forecast, and it does not adjust for seasonality, customer concentration or one-off items in your accounts.
• The calculator does not check whether the figures you enter are correct. The estimate is only as good as the inputs.

We recommend consulting a qualified financial professional before making any financing decision. For what each facility is and when businesses use it, read the guide to business finance facility types. For who provides the calculator, see About.