You can calculate EBITDA in two main ways:

1. By adding depreciation and amortisation expenses to your operating profit (EBIT).
2. By adding interest, tax, depreciation, and amortisation expenses back to your net profit.

To effectively use EBITDA, it’s essential to understand the meaning of each component in the formula:

Earnings: This typically refers to your net profit as reported to HMRC. Net profit is the total revenue generated from sales, minus the total amount deducted as legitimate business costs.

Before: The ‘B’ in EBITDA stands for ‘before’. It implies that the following items, when considered in your net profit calculation, should positively alter your net profit and assets.

Interest: This is the interest charged on debt repayment and is added back to your earnings.

Taxes: EBITDA recalculates earnings by adding back taxes. Tax amounts can fluctuate between periods and are influenced by various factors that may not directly relate to your business’s operational performance.

Depreciation: This accounts for the decrease in value of tangible (physical) assets like machinery or vehicles over time. EBITDA includes this loss in value.

Amortisation: This pertains to the gradual expiration of intangible (non-physical) assets such as patents or copyrights. In EBITDA, amortisation is also added back.

EBITDA, pronounced like “ee-bit-dah,” is a way banks measure how well a business is doing. It stands for the money a business makes before taking out costs like interest, taxes, and wear and tear on equipment. To understand how this is calculated, check out the section on ‘How to Calculate EBITDA.’

Since EBITDA doesn’t consider how a business gets its money (like loans or investments), banks use it to:

1. Compare two businesses that are similar.
2. See how good a business is at making cash.

Secured Loan: Secured loans are backed by collateral. This means that the borrower pledges an asset, such as property, equipment, or debtors, to the lender as security for the loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the loan amount. This type of lending is typically considered lower risk for the lender, as they have a tangible asset to recover in case of default. As a result, secured loans often come with lower interest rates and longer repayment terms.

Unsecured Loan: Unsecured loans, on the other hand, do not require any collateral. These loans are granted based on the borrower’s creditworthiness and business strength. Since there’s no collateral to claim in case of default, unsecured loans are considered a higher risk for lenders. Therefore, they usually have higher interest rates than secured loans and might have shorter repayment periods. They are often chosen by businesses that either do not have assets to offer as collateral or prefer not to risk their assets.

Determining the right finance option for your business involves a comprehensive approach. Start by assessing your financial requirements, including the loan amount, purpose, and urgency. Explore various financing avenues like bank loans, alternative lenders, and government-backed options, each with pros and cons.  Consider each lender’s costs, terms, and eligibility criteria before considering your application.

It’s not an easy task, and the options are vast; you may wish to use an expert in this field like Pinpoint Finance, who specialises in understanding your business sector, financial stability, and understanding the market. We access a broad market of lenders, selecting those that align with your specific needs and affordability. Our expertise helps navigate complex financial decisions, ensuring a sustainable solution for your business’s future.

The main difference is who controls the sales ledger and collects the debts. With invoice discounting, you maintain control and manage your own collections. In factoring, the factoring company takes control of collecting the outstanding invoices. Invoice discounting is usually confidential, meaning your customers won’t know you’re using the service.

It provides immediate working capital based on your sales, not your credit. This means you don’t have to wait for customers to pay their invoices to access funds, helping you manage cash flow more effectively, especially if you have long payment terms with customers or are a rapidly growing business.

Invoice discounting (or Cash flow finance) is a way to use your business’s unpaid invoices to improve cash flow. Essentially, a specialist lender advances you a percentage of the invoice value immediately, and you get the rest (minus fees) when your customer pays you.

Lenders will look at your credit score, business revenue, how long you’ve been in business, and your ability to repay the loan. A strong credit score and steady business income can improve your chances of approval and secure better terms.