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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Debt capacity

What is debt capacity, and how does a lender work it out from cash flow?

ONE OF 416 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Debt capacity is the most a business could borrow and still service from its own cash flow, worked backwards from the earnings rather than forwards from the request. A lender takes the cash available for debt service in a cautious case, divides it by the cover required to find the annual debt service it can carry, and converts that into a loan at the rate and term on offer. In one composite file, US$3m of cash available, cover set at 1.5 times, a 7% rate and a seven-year term repaid in level annual instalments give US$2m a year of debt service, or roughly US$10.8m of debt.

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

Debt Capacity: a Worked Example →

Start from the cash, and the loan is the answer, not the question.

// WHAT IT IS NOT

Serviceability asks whether a borrower can meet a given loan; debt capacity turns the question round and asks how large a loan the cash flow would carry.

// WORKED IN

// NEXT TO IT

READING THE NUMBERS

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