Cash Flow, the B&I Way
A look at how a business’s cash flow is calculated and how it’s used by USDA Business & Industry lenders
When a B&I lender evaluates a loan application, the first question they’re really asking is: can this business afford the payments? Cash flow is how they answer it. It measures how much income a business generates that’s available to service debt – and it’s the single biggest factor in whether a B&I loan gets approved. Understanding how lenders calculate and evaluate cash flow gives borrowers a clearer picture of where they stand before they apply.
How Cash Flow Is Calculated for USDA B&I Loans
Cash flow for B&I lending purposes isn’t the same as what a business owner might think of as ‘profit.’ Lenders start with the business’s net operating income (NOI) for a given year, then add back certain non-cash expenses and costs that won’t continue after the loan closes. This adjusted figure gives a more realistic picture of the income available to make loan payments.
The most common method is EBIDA – earnings before interest, depreciation, and amortization. The lender takes NOI and adds back interest expense (which will be replaced by the new loan’s payments), depreciation (a non-cash accounting entry), and amortization (also non-cash). The result is that year’s cash flow.
Beyond the standard EBIDA add-backs, lenders may adjust for other items on a case-by-case basis. Common examples include one-time expenses that won’t recur, rent costs that will be eliminated by a real estate purchase, and above-market owner compensation in business acquisition deals where the new owner will draw less.”
How Cash Flow Is Used by B&I Lenders
With cash flow calculated, the lender measures it against the proposed loan payment using the debt service coverage ratio (DSCR). The formula is straightforward: divide the annual cash flow by the annual loan payment. A DSCR of 1.0 means the business generates exactly enough to cover the payment. Anything above 1.0 provides a cushion.
Lenders don’t just look at a single year. They typically calculate DSCRs for the three most recent full fiscal years plus the current year-to-date if available. The trend matters as much as the numbers themselves – a business with improving cash flow over three years tells a very different story than one that’s declining, even if the most recent year’s DSCR looks identical.
Most B&I lenders target a DSCR of 1.25 or higher, but this isn’t a hard line. A lower ratio may be acceptable for projection loans – deals where there’s a clear, documented reason to expect cash flow to improve after closing. A common example is a business acquisition where the new owner plans operational changes that will increase revenue or reduce costs. On the other hand, riskier deals (unusual industries, volatile markets, thinner collateral) may require a higher DSCR to get approved.
USDA B&I Cash Flow Example
Calculation
Here’s a simplified example of how a B&I lender would evaluate a deal. A borrower is seeking a $3,500,000 USDA B&I loan to purchase a gas station, including the real estate and business. The lender reviews the most recent year’s financials, and sees the gas station had a NOI of $378,000 last year. Using EBIDA, the lender adds back the costs for:
- Interest: $38,000
- Depreciation: $18,000
- Amortization: $12,000
and because
$38,000 + $18,000 + $12,000 = $68,000
and
$378,000 + $68,000 = $446,000,
this gives us a cash flow of $446,000.
Use
The lender then uses the cash flow to calculate the business’s DSCR. The lender is planning to offer an interest rate of 9% for a 30 year, fully amortized USDA B&I loan of $3,500,000.
At that interest rate and term:
The monthly payment for the loan would be $26,162
The total yearly payment would be $337,944
The lender then divides the cash flow by the total yearly payment:
$446,000 / $337,944 = 1.32
A DSCR of 1.32 means the gas station generates about 32% more cash flow than needed to cover the loan payment – a solid margin above the typical 1.25 target. The lender repeats this calculation for the two prior years, confirms the trend is stable, and moves forward with the loan.
