Gearing ratio: what it means for business borrowing
The gearing ratio measures how much of a business is funded by borrowing compared with the owners' money. The most common…
Business loans
Interest cover: what it means for business borrowing
Interest cover meaning: how many times profit or rent covers interest. The formula, a UK example, interest cover vs DSCR, and how lenders use it in covenants.
In this guide
Interest cover, or the interest cover ratio (ICR), measures how many times a business's profit covers the interest it pays. Lenders use it to judge whether borrowing is affordable and often set a minimum level as a loan covenant.
The formula
Interest cover = operating profit (or EBITDA) ÷ annual interest.
A company with operating profit of £180,000 and interest of £45,000 a year has interest cover of 4 times. If profit fell to £90,000, cover would drop to 2 times.
Interest cover on let property
For investment property, lenders use rent instead of profit: ICR = annual rent ÷ annual interest. A unit let at £48,000 a year with interest of £30,000 has an ICR of 1.6, or 160%. Lenders usually test this at a stressed interest rate rather than the pay rate, so a loan can fail the test even when today's rent comfortably pays today's interest.
Interest cover or DSCR?
Interest cover looks only at interest. The debt service coverage ratio (DSCR) compares cash flow with interest and capital repayments together, so it is the stricter test for a repayment loan. Lenders often use interest cover for interest-only and property loans, and DSCR for amortising business loans.
£212,300A transaction we arrangedApproved, then nearly lost at completion. £212K consolidated.A property-title requirement threatened a consolidation deal at the last hurdle. We worked it through and kept the structure intact.How interest cover affects borrowing
- It can cap the loan: on a let property, rent and the stressed rate often limit the loan below the LTV maximum.
- It appears as a covenant: falling below the agreed level can be a breach, even with every payment made on time.
- Rising rates reduce cover on variable-rate debt, so lenders look at headroom.
See commercial investment mortgages for rent-based lending, or test a business loan with our DSCR calculator. We search the market for lenders whose affordability tests suit your figures. Any broker fee depends on the lender, with nothing to pay upfront.
Related terms
Sources
This guide is general information, not financial advice. Lenders set their own criteria, rates and terms, and all finance is subject to status.
Quick enquiry
Want to talk your situation through?
Not ready for the full application? Leave a few details and a broker will call you to talk it through. It is free, with no obligation.
- One short conversation, no paperwork yet
- Whole-of-market search across 300+ lenders
- Or call us on 01244 267694
FAQs
Common questions
What is a good interest cover ratio?
The higher the better: a ratio of 3 or more means profit is three times interest. Each lender sets its own minimum by product and sector, so check the covenant in your offer rather than a general rule.
How do you calculate interest cover?
Divide operating profit (or EBITDA) by the year's interest. £150,000 of profit and £50,000 of interest gives interest cover of 3 times. For a let property, divide annual rent by annual interest.
Keep reading
All guidesRelated guides and options
EBITDA: what it means for business borrowing
EBITDA stands for earnings before interest, tax, depreciation and amortisation. It is a business's operating profit with…
Loan to value (LTV): what it means for business borrowing
Loan to value (LTV) is the size of a loan as a percentage of the value of the property or asset it is secured on. A £300,000…
CCJ: what it means for business borrowing
A CCJ (County Court Judgment) is a court order in England and Wales telling a person or business to repay a debt after a…
Collateral: what it means for business borrowing
Collateral is an asset a borrower pledges to a lender as security for a loan, which the lender can sell to recover its money if…
Early repayment charge: what it means for business borrowing
An early repayment charge (ERC) is a fee some lenders charge if you repay all or part of a loan before the end of its term or…
Our clients say
Trusted by UK businesses across every sector.
“Simon was fast, kept us updated at all stages and was a real pleasure to work with on our asset finance. I highly recommend this company: excellent service all round.”
“Spoke with Simon, who managed to get me the loan I needed promptly. The whole process was very smooth and was completed within a few days.”
“Getting a business loan can feel like a bit of a minefield, but everything was broken down for me in great detail. Will use again in the future!”
“Simon was a pleasure to deal with and helped us find a business loan that matched our growth goals and future expansion plans.”
“I couldn’t source funding for my business, but the team got in touch within an hour and had it sorted within 24 hours. Fantastic service, and I would definitely use them again.”
300+UK lenders searched,
whole of market
whole of market
From reading to doing
Need help applying this to your business?
A short conversation is often enough to know which lenders will look at your case and how to present it. There is no obligation, and it is free to enquire.