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.

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.

Start by preparing your financial statements, a detailed business plan, and a credit report. Choose a lender – it could be a high-street bank, a challenger lender or an online-only lender. Each lender has different requirements and application processes, so it’s important to research and choose one that fits your business needs.

Several types include term loans, lines of credit and assets finance (equipment loans). Term loans provide a lump sum with a fixed repayment schedule. Lines of credit offer flexibility to draw funds as needed, and asset finance is for purchasing business equipment with the loan term determined by the asset type.

Terms can vary widely, typically ranging from 5 to 25 years. Interest rates are usually higher than residential mortgages due to the perceived higher risk. They can be fixed or variable and depend on factors like your business’s financial situation, the type of property, and the loan-to-value ratio.

To qualify, lenders will look at your business’s financial health, the potential of the property itself, and your creditworthiness. They’ll want to see a solid business plan, proof of steady income, and a good credit history. The property’s value and how you plan to use it also play a crucial role.

A commercial mortgage is a loan secured against a property used for business purposes. This could be an office, a shop, a warehouse, or any other type of commercial property. The key difference from a residential mortgage is that it’s for property used primarily for business activities, not for living in, with affordability based on the performance of your business.

Businesses should carefully weigh their options when choosing between traditional bank loans and alternative financing:

• Interest Rates and Terms: Compare interest rates, repayment terms, and any hidden fees associated with both options.
• Speed of Funding: Alternative lenders often provide quicker access to funds than traditional banks.
• Credit Requirements: Some alternative lenders are more flexible with credit requirements, which can benefit businesses with less-than-perfect credit.
• Collateral: Consider whether you’re comfortable offering collateral, as traditional bank loans may require it.
• Repayment Structure: Evaluate the repayment structure that aligns best with your cash flow.
• Long-Term Goals: Think about your long-term financial goals and how each financing option fits into your business plan.

Ultimately, the choice between traditional and alternative financing depends on your business’s unique needs and financial situation. Seeking advice from a financial expert can help you make an informed decision.