Quick answer
UK SME lenders typically test affordability by comparing free monthly cashflow against the proposed repayment. The most common metric is a debt-service cover ratio (DSCR), usually targeted at 1.25x or higher, calculated from EBITDA divided by annual debt service. Lenders also stress-test against rate rises, look at bank-statement cashflow patterns, and check whether the loan plus existing debt remains serviceable in a softer trading month.
The two main affordability tests
The headline test is the debt-service cover ratio. Lenders take a measure of cashflow - usually EBITDA from the most recent accounts, sometimes adjusted for one-offs - and divide by total annual debt service (principal plus interest on all facilities). Most want 1.25x as a floor; many want 1.5x; commercial-mortgage lenders for investment property often want 1.4x rental cover stressed at a higher rate.
The second test is bank-statement-level cashflow. Underwriters look at the average month, the worst month in the last six, and the trend. A business that hits affordability on average but goes negative in two of the last six months is treated differently to one that hits it consistently.
Stacked debt and the affordability stack
Lenders sum all existing facilities, not just the new one. If you already have an MCA repaying at £4k a month, an invoice-finance facility costing £1k a month, and a credit card balance with £500 minimum payments, that £5.5k a month is already in your affordability stack before the new loan.
Stacked debt is a common late-stage decline reason precisely because the headline DSCR can look fine on the new loan in isolation but fail once existing debt is layered in. Lenders typically ask for a full disclosure of existing facilities at application, and bank statements will reveal anything you do not declare.
Stress tests and seasonality
Lenders typically apply a stress test, particularly for variable-rate or longer-term facilities. Commercial mortgage lenders may stress the rate by 2-3 percentage points to see whether the cover holds. Term-loan lenders may model affordability at a higher rate to make sure that any future rate moves do not break the deal.
Seasonality is a real factor for hospitality, retail and any business with concentrated revenue periods. A summer-heavy operator with strong July-August figures and weak January-February needs to evidence that off-peak months still cover the repayment, or have a sensible buffer that does.
How to evidence affordability well
Submit clean, recent management accounts alongside filed accounts where the filed accounts are over six months old. The lender wants the most current view of the business, not last year's snapshot.
Provide bank statements as native PDFs from the bank, not screenshots. Underwriters parse them, sometimes automatically, and need transactions readable.
If there is a one-off cost that depressed the last quarter (a refit, a recruitment push, a tax payment), explain it in a one-paragraph note rather than letting the underwriter assume the trend is negative.
Key points
- DSCR target is typically 1.25x or higher, sometimes 1.5x.
- Bank-statement cashflow is checked alongside accounts.
- Existing debt is summed into the affordability stack.
- Stress tests are common for variable-rate or longer-term facilities.
- Clean management accounts and explained one-offs help.
Finance types that may be relevant
The product categories below are commonly considered for this situation. Suitability is subject to lender underwriting and your trading profile.
Unsecured Business Loan
Term loan or credit line repaid through fixed instalments.
Secured Business Loan
Larger bespoke cashflow or asset-backed debt.
Commercial Mortgage
Long-term commercial property purchase/refinance funding.
Related guides
Frequently asked questions
- What DSCR do lenders want?
- Typically 1.25x as a floor for term loans, 1.5x or higher for larger or longer-term deals. Investment commercial mortgages often want 1.4x stressed rental cover.
- Do lenders use EBITDA or net profit?
- Usually EBITDA, often with adjustments for one-offs and director's remuneration. The precise definition varies by lender.
- Does affordability include existing debt?
- Yes. Lenders sum the new facility with everything else you owe before testing cover. This is why disclosed stacked debt is often the difference between approval and decline.
- How current do management accounts need to be?
- Usually within three months, sometimes within six for smaller deals. The older they are, the more weight bank statements get.
Compliance note
Eligibility guidance only - not financial advice, not a loan offer, not a guarantee of approval.