EBITDA: What Business Loan Brokers Need to Know

For business loan brokers: This guide explains EBITDA: What Business Loan Brokers Need to Know through the lens of evaluating a client’s situation, preparing the file, and discussing financing options clearly.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is a financial metric widely used in business analysis. It provides a picture of a company’s profitability by excluding certain non-operating expenses.

Understanding EBITDA is helpful for many stakeholders, like investors, business owners, and, of course, lenders.

Read this guide for more information on:

• EBITDA meaning.
• How to calculate EBITDA.
• EBITDA vs net income.
• EBITDA example.

Why is EBITDA Important?

EBITDA provides a snapshot of a company’s profitability from its core operations without taking into account non-operating and non-cash expenses. It’s important because it helps stakeholders assess a company’s ability to generate income solely from its operations.

By excluding interest, taxes, depreciation, and amortization, EBITDA provides a representation of a company’s operational speed and profitability.

Company owners can also use EBITDA for financial planning and monitoring debt repayments.

How to Calculate EBITDA

To calculate EBITDA, start with a company’s net income or operating income and add back interest, taxes, depreciation, and amortization expenses.

The formula for calculating EBITDA is as follows:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA example

Let’s say company “ABC” reported the following:

• Net income of $1 million
• Interest expenses of $200,000
• Tax expenses of $300,000
• Depreciation expenses of $150,000
• Amortization expenses of $50,000.

Using the formula mentioned earlier, we can calculate EBITDA as follows:

EBITDA = $1,000,000 + $200,000 + $300,000 + $150,000 + $50,000 = $1,700,000

Understanding the Meaning Behind the Numbers

While EBITDA provides some insight into a company’s operational speed, it should not be viewed as a standalone metric. It is essential to analyze EBITDA in conjunction with other financial indicators, such as net income, cash flow, and revenue growth.

A high EBITDA figure indicates that a company is generating strong operational profits, while a low EBITDA may suggest ingains or a challenging industry environment.

EBITDA vs. Net Income

EBITDA and net income are two financial metrics that provide different perspectives on a company’s profitability. Net income represents the bottom line after accounting for all expenses, including interest, taxes, depreciation, and amortization. On the other hand, EBITDA focuses solely on operational profitability by excluding these expenses.

Most experts say that although EBITDA is a fair indicator of a company’s performance, net income offers a more comprehensive view of a business’s profitability.

Strategies for Businesses to Increase EBITDA

A strong EBITDA figure can improve a company’s creditworthiness, making it easier to secure funding. Some lenders and investors often consider EBITDA as a key indicator of a company’s ability to generate profits and repay debt.

Improving Operational Speed

By identifying and addressing ingains in their operations, businesses can increase their EBITDA. This can be achieved through internal audits, better inventory management, process optimization, cost reduction initiatives, and technology adoption.

Enhancing Revenue Streams

Increasing revenue can directly impact EBITDA. Businesses can achieve this by expanding their customer base, introducing new products or services, or entering new markets. By diversifying revenue streams, businesses can generate more substantial EBITDA figures.

Is EBITDA Recognized by GAAP?

EBITDA isn’t on some business income statements because it’s not recognized by the Generally Accepted Accounting Principles (GAAP). This is primarily because it does not match expenses with revenues.

There is also a criticism that EBITDA can artificially make companies look better, especially if they have borrowed huge sums of money and are facing increasing capital and development costs.

Ultimately, the significance of EBITDA can vary from industry to industry. In capital-intensive industries such as manufacturing or infrastructure, the metric can be more relevant. However, in service-based industries, it may be less relevant.

Financing Options for New Startups and Small Businesses in Canada

EBITDA isn’t particularly relevant for new startups and small businesses. Such businesses will need to satisfy one or more of the following metrics to qualify for funding and increase their business capital:

• Business credit score.
• Personal credit score.
• Collateral.
• Bank statements.
• Balance sheet.
• Annual revenue.
• Business cash flow.
• And more.

Let’s explore some of the popular financing options for startups and small businesses in Canada:

Online Small Business Loans

Online small business loans provide a convenient and accessible financing option for startups and small businesses in Canada. The client can apply for such a loan with Levr.ai. We have simple the application process and only work with certified lenders for online small business loans in Canada.

Business Credit Cards

With businesses no longer able to apply for the CEBA loan, business credit cards can be handy in an emergency. Companies can purchase essential supplies, equipment, and services with them when cash is tight.

MCA Loans

Merchant Cash Advance (MCA) loans are a financing option that provides immediate cash flow for businesses in exchange for a portion of future sales. MCA loans are particularly suitable for businesses with a steady stream of credit card sales, such as retail stores or restaurants.

Business Equipment Loans

If the client’s company needs technology but lacks capital, consider business equipment loans. These loans are specifically designed to help businesses acquire the necessary equipment to operate and grow. These loans can be used to purchase or lease equipment, such as machinery, vehicles, or technology systems.

SRED loan

An SRED loan is a specialized financing option for technology startups in Canada. The SRED (Scientific Research and Experimental Development) program provides tax incentives for businesses engaged in research and development activities.

If the client’s startup does not qualify for SRED and the client is wondering how to finance technology startups, here are some other options:

• Venture capital firms invest in high-potential startups in exchange for equity ownership. These investments provide capital for growth and often come with the added benefit of strategic guidance and industry connections.
• Angel investors are high-net-worth individuals who provide capital to startups in exchange for equity. These investors can offer valuable expertise and mentorship in addition to financial support.
• Crowdfunding platforms allow startups to raise capital from a large number of individuals who contribute small amounts. This approach can help validate the business idea and create a community of early adopters.

About Levr.ai

Levr helps business loan brokers collect client information, organize documents, prepare lender-ready applications, and manage lender conversations while keeping the client relationship.

Brokering a client financing request? Compare every business loan type, or see how Levr matches the client’s business to lenders.

How brokers can use Levr

Levr supports business loan brokers as they organize client information, prepare applications, manage documents and communication, and move deals through their lending workflow.

Create a free broker account