How much debt can your company afford, and how do lenders size a facility?

Short answer: Your company can afford the lowest debt amount produced by three tests: cash-flow coverage in a realistic downside case, balance-sheet leverage, and any collateral or borrowing-base limit. A lender then reduces that ceiling for its risk appetite, policy, concentration, structure, covenant headroom, and the quality of your evidence.

Owners often start with the amount they want. Lenders start somewhere else: what the money will fund, where repayment will come from, what could go wrong, and how the facility will protect them if performance weakens. Those questions can produce a facility below the requested amount even when the company is profitable.

This guide is for owners, CFOs, finance leaders and PE-backed management teams considering a term loan, revolver, acquisition facility, refinancing or other corporate debt. It explains how to build a borrower-side capacity view, how lenders translate that into an underwritten facility, and why the company should usually operate below the largest amount available.

Debt capacity and facility size answer different questions

Debt capacity is the amount the company can carry while paying obligations, funding normal operations and retaining enough room for a plausible downside. Facility size is the amount a particular lender is willing and able to commit under a particular structure. The two numbers may be close, but they are not interchangeable.

That last question matters. An undrawn commitment can protect liquidity. Drawing to the limit can remove the same protection. The legal maximum is not automatically the prudent operating maximum.

Start with the company's own affordability ceiling

1. Rebuild cash flow before applying a ratio

Do not begin with a market multiple. Begin with the cash the business can reasonably produce for debt service after the cash demands required to keep it operating. EBITDA is a useful starting point, but it is not cash available to lenders.

A practical bridge normally considers cash taxes, maintenance capital expenditure, working-capital movement, lease or rent obligations where relevant, existing debt service, required distributions and other fixed commitments. The exact bridge depends on the instrument and the definitions in the proposed documents. If adjusted EBITDA is important to the case, reconcile every add-back to evidence and explain whether it will recur. Alehar's guide to Adjusted EBITDA explains that discipline.

Cash available for debt service = sustainable operating cash flow minus the cash commitments that must be paid before new debt service

This is a management model, not an accounting standard. Make each line visible. A lender may use a different definition, so keep the lender calculation and the board's affordability calculation side by side rather than blending them.

2. Build a base case and a real downside case

A capacity model that works only when the budget is achieved is not a capacity model. The downside should reflect the company's actual vulnerabilities: lower volume or price, margin compression, a delayed customer payment, customer loss, inventory build, higher input cost, slower integration, a rate increase or currency movement where relevant.

Basel Committee credit-risk guidance says banks should consider the purpose and sources of repayment, the borrower's current capacity to repay using historical trends and future cash-flow projections under different scenarios, proposed terms and covenants, and the adequacy of collateral or guarantees. That does not set one borrower ratio. It describes the questions a credible model must answer.

Run the downside through the full balance sheet and cash flow. A reduction in sales can lower EBITDA and increase working-capital usage at the same time. A forecast that changes the income statement but leaves receivables, inventory, payables and cash untouched will usually overstate capacity.

3. Translate cash flow into debt service

Debt service coverage ratio, or DSCR, compares cash available for debt service with scheduled principal, interest and any other payments included in the agreed definition.

DSCR = cash available for debt service / total scheduled debt service

There is no single DSCR threshold that applies to every company and facility. The required level depends on cash-flow volatility, facility type, amortization, collateral, sector, jurisdiction and lender policy. The European Banking Authority's loan-origination guidelines, for example, list interest-bearing debt to EBITDA, total debt-service coverage, cash debt coverage, future cash-flow analysis and debt service among metrics that institutions may consider for enterprise lending. The applicable set remains credit specific.

Use the proposed rate, fees, amortization, interest-only period and maturity. A longer tenor may reduce scheduled annual principal, but it can increase total interest and refinancing risk. A balloon may make near-term coverage look comfortable while leaving a large maturity the business cannot repay without a future refinancing.

4. Convert debt service into principal capacity

Once the model shows the annual or monthly debt service the business can support, solve for principal under the proposed structure. This is why asking for an amount before discussing tenor and amortization is incomplete. The same cash flow can support different principal amounts under a fully amortizing loan, a partially amortizing loan, an interest-only revolver or a facility with a balloon.

Model the actual payment schedule, not a shortcut based only on interest expense. Include existing facilities and any debt that will remain after closing. Where the transaction refinances old debt, use a sources-and-uses schedule so the model separates gross new borrowing, debt repaid at closing, fees, cash retained and net incremental funding.

5. Test leverage and the path back down

Cash-flow coverage tests whether scheduled payments can be made. Leverage tests how large the debt burden is relative to earnings or another operating measure. A typical calculation starts with gross or net debt divided by an agreed EBITDA measure, but the numerator and denominator both need definition.

• Debt: identify drawn bank debt, shareholder or seller debt, leases, guarantees, letters of credit and other obligations according to the proposed definition.
• Cash: do not assume every cash balance can be netted. Some cash may be restricted, trapped, required for operations or excluded by the lender.
• EBITDA: reconcile reported, adjusted, pro forma and covenant EBITDA. Apply lender haircuts to unsupported or uncertain add-backs.
• Deleveraging: show how principal reduces from operating cash flow, not only through a future sale or refinancing.

For leveraged transactions, U.S. interagency supervisory guidance expects realistic base and downside projections to support repayment and deleveraging over a reasonable period. It also warns that nominal cash-flow paydown with refinancing as the only viable exit is weak repayment evidence. The guidance is specific to leveraged lending, but the underlying lesson is broader: maturity is not a repayment plan.

6. Set liquidity and covenant headroom

A facility can pass the lender's opening tests and still be too tight for the company. Management should set a minimum cash or availability floor and test covenant headroom at the weakest point in the forecast, not only at closing. Link each covenant calculation to the exact agreement definition and reporting date. For the main covenant types and negotiation points, see Alehar's guide to debt covenants.

Headroom is not idle capacity. It absorbs forecast error, seasonality, delayed receipts and one-time costs. If the model consumes nearly all headroom in the base case, the requested debt amount is probably too high, the structure is wrong, or more equity is needed.

How a lender turns capacity into facility size

A lender does not simply accept management's model and apply a multiple. The underwriting process usually changes both the forecast and the structure. The latest OCC lending and loan-portfolio handbook groups commercial credit underwriting around structure and sources of repayment, collateral, and controls such as reporting requirements, inspections and covenants. Those categories provide a useful way to follow the credit process even outside the United States.

1. Confirm the purpose and exact funding need

The lender first asks what the facility funds and when the cash is needed. Permanent investment usually calls for committed term capital. Seasonal working capital may fit a revolver that draws and repays with the cash cycle. Equipment may support asset finance. An acquisition facility must be sized against the post-transaction capital structure and integration case.

The use of proceeds creates one ceiling. A lender will not normally increase a facility merely because a leverage ratio allows more debt. Present a reconciled sources-and-uses schedule, the timing of each use, contingency and the equity or cash contribution.

2. Normalize management's earnings and forecast

The lender tests historical performance, management accounts, bank statements, tax or statutory filings where applicable, customer and supplier concentrations, backlog or contracts, and forecast assumptions. It may remove add-backs, discount synergies, adjust margins, change working-capital assumptions or apply a more severe downside.

This is often where the requested amount changes. The gap is not always a disagreement about the lender's leverage multiple. It may come from a lower underwritten EBITDA, a higher working-capital requirement, a different debt definition or a more conservative payment schedule.

3. Apply the product-specific sizing method

For a borrowing-base facility, availability is normally the lower of the contractual commitment and the current borrowing base, less outstanding drawings and any required block. The borrowing base applies advance rates to eligible collateral and then deducts reserves. The OCC's asset-based lending handbook explains that eligibility, advance rates and recalculation frequency are defined in the loan agreement, with receivable agings, inventory reports and field audits supporting ongoing control.

A large commitment therefore does not guarantee equal cash availability. Read Alehar's guide to revolver debt for the borrowing-base, draw, repayment, pricing and monitoring mechanics.

4. Apply lender policy, hold limits and portfolio constraints

Even when the company supports more debt, a lender may be limited by its product mandate, minimum or maximum ticket, single-borrower authority, sector exposure, geography, collateral policy, risk rating, concentration or desired hold size. Another lender can reach a different answer without either model being mathematically wrong.

This is why lender selection should follow capacity and structure. A broad list does not solve a mandate mismatch. Once the case is defined, use Alehar's Business Lenders Directory to build an initial market map where local coverage exists, then verify current mandate, amount, product, security and jurisdiction directly with each provider.

5. Add covenant, documentation and closing constraints

Credit approval can be conditional. The lender may require minimum equity, debt repayment, security perfection, guarantees, insurance, an appraisal, a field examination, customer evidence, consent from another creditor or delivery of specified financial information. It can also size the commitment above immediate availability, with later drawings permitted only after conditions are met.

Separate three outputs in the term sheet review:

• Committed amount: the contractual maximum before product-specific limits.
• Day-one availability: what can actually be drawn at closing after conditions, blocks and the current borrowing base.
• Operating availability: what management permits itself to use after preserving internal liquidity and covenant headroom.

The five ceilings that determine the answer

The preliminary facility is usually bounded by the lowest applicable ceiling, then shaped by tenor, amortization, covenants, security and conditions. The company's own operating limit may be lower again.

Worked example: fictional Northbridge Components

Northbridge Components is an explicitly fictional mid-sized manufacturer. It wants a secured term facility for equipment and permanent working capital. Every assumption used in this simplified example appears below. The figures are illustrative only and are not a lender benchmark.

The collateral ceiling binds even though cash flow and leverage support more. A lender could change the result by changing eligible collateral, the advance rate, structure, amortization or policy cap. Management could still choose a lower operating limit to preserve additional liquidity. The example shows why a single EBITDA multiple does not answer the question.

What commonly produces a misleading debt-capacity answer

• Starting with the desired amount. The funding ask should come from sources and uses, not negotiation ambition.
• Using EBITDA as cash. Taxes, maintenance capex, working capital and other fixed obligations can consume the apparent cushion.
• Applying a leverage multiple to an unsupported EBITDA. Add-backs that do not survive underwriting inflate the numerator and the result.
• Ignoring existing and off-balance-sheet obligations. Guarantees, letters of credit, seller debt, leases and holding-company debt can affect the complete credit view.
• Testing only the annual budget. Monthly seasonality and intra-year cash lows can create a payment or covenant problem that the full-year result hides.
• Assuming commitment equals availability. Borrowing bases, reserves, conditions and minimum blocks may reduce what can be drawn.
• Using maturity as the repayment source. A refinance assumption should be supported and stressed, not treated as automatic.
• Treating the covenant limit as the operating plan. Internal alert levels should trigger action before the legal threshold is close.

Build the pack that lets a lender size the right facility

A clear credit case reduces avoidable differences between management's request and the lender's analysis. Prepare one reconciled pack with:

• a precise use of proceeds and timing schedule;
• historical financial statements, current management accounts and a bridge between them;
• an integrated monthly profit-and-loss, balance-sheet and cash-flow forecast;
• base and downside cases with visible operating assumptions;
• a complete debt schedule, security map, guarantees, maturities and existing covenants;
• an adjusted EBITDA bridge with evidence for every proposed adjustment;
• a debt-service and covenant model using each proposed structure;
• receivable agings, inventory analysis, appraisals and title evidence where collateral matters;
• a management explanation of variances, customer or supplier concentrations and mitigation actions; and
• a clear request covering amount, product, tenor, amortization, security, covenant headroom and draw timing.

Alehar's Business Loan Guide provides a shorter readiness overview. For an initial quantitative screen, use the Debt Capacity Calculator, then replace its assumptions with the company's actual cash flow, documents and proposed lender terms.

Choose the facility below the mathematical maximum

The best answer is not the largest number a spreadsheet or lender can produce. It is the structure that funds the plan, survives a credible downside and leaves management with room to make decisions. That may mean less debt, more equity, a different instrument, staged drawings, a longer preparation period or a smaller first transaction.

Alehar helps owners and finance teams build the debt-capacity model, structure the funding requirement, prepare lender materials, compare proposals and run a focused financing process through Raising Equity or Debt. Contact Alehar to discuss the facility before lender outreach begins.