FinReady

EBITDA for Small Business Owners: The Number Your Lender Cares About Most

Your lender doesn't care about your net income. Not really. What they care about is your EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. Here's why, and how to calculate it without an accounting degree.

Why EBITDA matters more than net income

Net income is polluted. It includes accounting decisions (depreciation methods), tax strategies (timing of deductions), and financing choices (how much debt you carry). EBITDA strips all of that away and shows the raw earning power of your operations. Two identical businesses can have wildly different net incomes but similar EBITDAs.

The calculation — step by step

Let's use a real example. An industrial services company in Ontario:

Step 1: Start with net income: $55,319

Step 2: Add back income taxes: $55,319 + $2,096 = $57,415

Step 3: Add back ALL interest — bank fees ($12,277) + long-term debt interest ($38,348) = $50,625. Running total: $57,415 + $50,625 = $108,040

Step 4: Add back depreciation/amortization: $108,040 + $75,018 = $183,058

EBITDA = $183,058

Adjusted EBITDA: what lenders actually use

This company also had an $83,282 gain from selling a truck. That's non-recurring — it won't happen again next year. A serious lender will back it out:

$183,058 - $83,282 = Adjusted EBITDA: $99,776

This is the number that determines your borrowing capacity. Not the $183K. Not the $55K net income. The adjusted $99,776.

What's a "good" EBITDA?

It depends on your industry, but as a general rule:

• EBITDA margin above 15% (EBITDA / Revenue): excellent
• 10-15%: acceptable for most industries
• Below 10%: you'll have trouble getting significant financing

The mistake I see constantly: owners who don't know their EBITDA. If your banker asks and you can't answer within 5 seconds, you've already lost credibility. Know your number.