Breakeven interest rate
What is a breakeven interest rate on a business loan?
ONE OF 416 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A breakeven interest rate is the rate at which a borrower's cash available for debt service would just meet its interest and scheduled repayments, so that debt service cover falls to 1.0 times. A lender calculates it to turn a rate stress into a distance: with US$2.5m available, principal of US$1m a year and opening debt of US$15m, cash can carry interest of up to US$1.5m, a breakeven rate of 10%. Read against the current all-in rate, the forward curve and any hedging in place, it shows how far rates would have to rise before the business pays its lenders from reserves or new money.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Breakeven Interest Rate: a Worked Example →
Fix the cover at one, then solve for the rate.
// WHAT IT IS NOT
A serviceability buffer is a set margin added to the current rate before cover is tested; the breakeven rate works the other way round, finding the rate at which cover runs out.
// WORKED IN
// NEXT TO IT
- Cash conversion cycle
- Quality of earnings
- Debtor days
- Debt service cover ratio (DSCR)
- Interest cover ratio
- Debt to EBITDA (leverage)
- Dividend payout ratio
- Debt per kgMS
- Fixed charge cover ratio (FCCR)
- Global cash flow
- Adjusted EBITDA
- Creditor days (DPO)
- Inventory days (DIO)
- Maintenance capex
- Gearing
- Tangible net worth
- Downside case
- Breakeven milk price
- Debt-like items
- Operating leverage
- EBITDAR
- First-lien leverage
- Cash conversion (ratio)
- Order book cover
- Farm working expenses (FWE)
- Cost of production (dairy)
- Advance rate schedule (dairy)
- Liquidity headroom
- Normalised working capital (working capital peg)
- Owner drawings
- Net debt (covenant definition)
- Cash netting cap
- LTM EBITDA (last twelve months)
- Run-rate EBITDA
- Pro forma EBITDA
- Add-back cap
- Cash flow available for debt service (CFADS)
- Loan life cover ratio (LLCR)
- FFO to debt
- EBITDAaL (EBITDA after leases)
- Free cash flow (lender's definition)
- Retained cash flow (RCF) to net debt
- Cash taxes (tax paid)
- Exceptional items (non-recurring items)
- Owner remuneration normalisation
- Capex-to-depreciation ratio
- Growth capex (expansion capex)
- Contribution margin
- Price-volume-mix analysis (PVM)
- Debt capacity
- Debt payback period
- Current ratio
- Quick ratio (acid test)
- Overtrading
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