Within SBA financing, EBITDA is a crucial metric used by SBA Lenders. It’s an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization and measures a company’s operating performance without factoring in certain non-operational expenses.

EBITDA highlights the exclusion of these specific expenses to provide a clearer picture of a business’s operational efficiency.  EBITDA provides a standardized metric that enables comparisons across companies and industries by eliminating the impact of capital structure and accounting policies. Simply put, it simplifies complex financial statements by focusing solely on core operations, making it easier for lenders to evaluate a company’s profitability. Lenders often use EBITDA as a proxy for a company’s cash flow, making it valuable for forecasting future performance and assessing the ability to service debt or creditworthiness. 

A higher EBITDA implies greater earnings potential and, consequently, a lower credit risk. In calculating a Debt Service Coverage Ratio (DSCR), EBITDA is a key component in measuring a company’s ability to cover its debt obligations. A higher EBITDA improves the DSCR, increasing the likelihood of loan approval. 

EBITDA also plays a pivotal role in valuation methodologies such as the “EBITDA multiple approach,” where a company’s value is determined by applying a multiple to its EBITDA. This valuation method is commonly used in merger and acquisition transactions, influencing lending decisions 

There are some criticisms and considerations of EBITDA, including the fact that EBITDA excludes essential expenses, such as interest and tax deprecation, which can obscure a company’s true financial health. However, as shown above, these factors are captured in calculating DSCR. Additionally, since EBITDA is a non-GAAP (Generally Accepted Accounting Principles) measure, there’s a risk of manipulation by companies aiming to present a more favorable financial picture.

From a bank’s perspective, EBITDA is a valuable tool in financial analysis, providing insight into a company’s operational performance and its ability to generate earnings. It is used along with DSC almost daily to determine a small business’s creditworthiness for a loan they may be seeking. When seeking SBA financing, businesses can leverage EBITDA to demonstrate profitability, enhance creditworthiness, and facilitate favorable lending terms.

Learn more at Meridian Bank. Headquartered in Malvern, Meridian Bank focuses on customer growth and building the economics of the markets it serves. Meridian specializes in business and industrial lending, retail and commercial real estate lending, along with a broad menu of high-yielding depository products.

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Meridian Bank Executive Vice President Rocco Perate leads the SBA Lending department and coaches his team to help small businesses. Perate aims to lead Meridian Bank to be the top SBA lender in the region for the fourth year in a row. The team has already achieved top lender status in Pennsylvania, No. 3 in New Jersey, and No. 47 in the country. Perate oversees every aspect of the SBA department, from building up his employees’ talents and doing underwriting to closing deals and managing portfolios. He solicits and produces borrowers for small business loans, as well as oversees new initiatives like Merit Business Funding.