Free cash flow (lender's definition)
What is free cash flow to a lender, and what comes out before debt service?
ONE OF 416 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Free cash flow, in a lender's reading, is the cash a business generates from trading after tax actually paid, working-capital movements and the capital spending it cannot avoid, before interest and principal on the bank's debt. A business with EBITDA of US$12m, cash tax of US$2m, a US$1m build in working capital and maintenance capex of US$3m has US$6m of free cash flow to meet its debt service. Definitions vary between analysts, companies and facility agreements: some deduct interest, lease payments or dividends, so a desk rebuilds the figure from the cash flow statement before reading any cover ratio against it.
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
Free Cash Flow for Lenders: a Worked Example →
What the business can pay the bank, once it has paid everyone else.
// WHAT IT IS NOT
Cash flow available for debt service is the project-finance version, defined in the facility agreement for a single asset; a lender's free cash flow asks the same question of a trading business, and a company's own published free cash flow is often struck after interest.
// 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)
- 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
- Breakeven interest rate
- Current ratio
- Quick ratio (acid test)
- Overtrading
// SUBSCRIBE
The Lab.
One case file and one question, in your inbox every Tuesday morning, New Zealand time. The senior banker's read opens only after you answer.
FREE WITH IT · THREE PDFS
An interview case, an annotated credit paper, and a one-page loan application sheet.
No spam. Unsubscribe anytime. Educational content only.