Debt Fund Raise · Question

How does a lender work out whether my cash flow can service new debt?

Short answer

A lender estimates the cash your business generates after operating costs and tax, adds back non-cash charges, subtracts what you already owe in repayments, and checks whether what remains covers the new instalments with a margin to spare. This is usually expressed as a debt service coverage ratio. The lender decides the margin it requires.

In more detail

The logic follows the money. Start from profit. Lenders add back depreciation, because it is an accounting charge rather than cash leaving the business, and add back interest, because the question is what is available to pay interest and principal together. They then compare this with total yearly obligations: interest plus scheduled principal across all existing and proposed loans.

If the available cash is comfortably higher than the obligations, the account looks serviceable. A thin margin leaves no room for a poor quarter, so lenders tend to want a cushion.

Lenders rarely stop at one ratio. They also look at:

Trend: whether profits and cash are rising, flat or erratic across several years.
Working capital: whether growing receivables and stock are absorbing the cash that profits suggest.
Projections: how reasonable your forecast sales and costs look against history.
Sensitivity: whether the loan is still serviceable if sales fall or costs rise modestly.
Other commitments: existing loans, lease payments and promoter withdrawals.

Present clean, consistent numbers, explain unusual years in a short note, and show projections that are cautious rather than ambitious. Tie sales assumptions to orders, contracts or capacity. Overstated forecasts that do not match the past reduce trust quickly.

Profit is not the same as cash

A business can show profit and still struggle to pay instalments if customers pay slowly or stock keeps growing. Lenders check for exactly this gap.

Key points

Lenders start with profit, add back non-cash charges and compare cash with total debt obligations.
A coverage margin above bare minimum is expected, and the lender sets it.
Trend, working capital and projections are tested alongside the ratio.
Cautious, evidence-based forecasts earn more trust than ambitious ones.
Profit that is tied up in receivables or stock does not repay loans.

Who this applies to

First-time borrowers curious about how repayment capacity is judged.
Finance heads preparing projections for a term loan proposal.
Promoters whose profit looks healthy but cash feels tight.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.