Preparing For A Loan Application? Understand Your EBITDA.

In Canada, banks and other lenders primarily consider EBITDA, not net income, when assessing a business's ability to service debt. Here's why, and what else they look at:

First, let’s look at a definition of EBITDA vs Net Income as it’s important to understand what each is.

✅  Definitions:

•  Net Income:  A required metric under accounting standards.  It is tax relevant and includes ALL operating and non-operating income and expenses in it’s calculation.  It is used directly in tax filings and to determine access to small business deductions available to corporations.

  
  

• EBITDA:  This stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.  It is not a required metric under accounting standards and is not tax relevant.  It is calculated using operating income and expenses only, and does not include any non-operating items.  It is used primarily for internal analysis, lending reviews or valuation.

  
  

✅ Why Canadian Banks Focus on EBITDA

1. EBITDA is a proxy for cash flow from operations

• EBITDA removes non-cash expenses (depreciation/amortization) and financing/tax structure differences, which can vary widely.

• This gives lenders a cleaner picture of how much cash a business generates to pay interest and principal on a loan.

  
  

2. Net Income can be distorted

• Net income includes:

  • Non-cash charges (depreciation, amortization)

  • Financing decisions (interest)

  • Tax strategy (deferrals, credits)

• These make it less reliable for judging repayment capacity.

  
  

🏦 What Banks Look at in Detail

Factor	Primary Metric Used
Ability to repay loan	✅ EBITDA and Debt Service Coverage Ratio (DSCR)
Profitability	✅ EBITDA, sometimes Net Income
Leverage and risk	✅ Debt-to-EBITDA, Debt-to-Equity ratios
Cash flow health	✅ Operating cash flow, EBITDA
Collateral	Asset values, not EBITDA or Net Income

📊 Example: Debt Service Coverage Ratio (DSCR)

One of the most common ratios banks use:

DSCR = EBITDA/Debt Service (Interest + Principal)​

• DSCR > 1.25 is typically required by banks.

• If EBITDA = $400,000 and debt payments = $300,000, DSCR = 1.33 (which is acceptable).

• 
  

Net income could be much lower due to depreciation and taxes, but it doesn't matter as much for repayment analysis.

🔍 Exceptions and Additional Considerations

• Small business loans (e.g., under $250K or backed by the Canada Small Business Financing Program) may also look at net income or personal income of the owner.

• For startups or early-stage CCPCs, personal guarantees or owner’s credit history may matter more than EBITDA.

• 
  

🎯 Bottom Line

Question	Answer
Do banks in Canada consider EBITDA when evaluating business loans?	✅ Yes – it’s often the main metric for assessing cash flow and repayment capacity.
Do they consider Net Income?	❌ Not as heavily – only as a secondary measure of profitability or tax efficiency.
Is EBITDA more important for CCPCs applying for loans?	✅ Yes – especially for operating businesses with sufficient revenues.

If you are preparing for a loan application, understanding and being able to calculate your EBITDA will be a very useful tool in your financing journey.  If you would like more information, please feel free to book a call to discuss further.