Harborpark Funding Group built this cash flow coverage page for Binghamton, New York owners. The calculator returns a monthly payment; the steps below turn that payment into a coverage ratio, with invented examples for a restaurant and a salon.
Cash Flow Coverage Formula: Operating Cash Flow Over Debt Payments
- Use the calculator for the monthly payment on the new loan.
- Turn that monthly figure into a yearly one by multiplying by 12.
- Add a year of payments on every current loan, lease, line and advance.
- Take the business's yearly operating cash flow before those payments.
- Divide the cash flow by the total yearly payments.
The result is the cash flow coverage ratio. Above 1.0, the business's cash covers its debt payments with something left over; below 1.0, it does not.
What Is a Cash Flow Coverage Ratio, and How Do Partners Read It?
A cash flow coverage ratio compares what a business brings in from operations with what it must pay on its debts. Lenders read it as a cushion: the higher the ratio, the more room the business has if sales slip. Each lender sets the ratio it wants to see and how it measures cash flow, so the result here is a check on your own numbers, not a test you pass or fail.
Illustration only, invented figures: a restaurant with $72,000 of yearly operating cash flow pays $21,000 a year on existing equipment notes. It is weighing a $60,000 loan at an invented annual rate of 10% over 60 months, which costs about $1,275 a month, or $15,298 a year. Total yearly payments would be $36,298, and the ratio is about 1.98 (our arithmetic).
What Is Debt Service Coverage Ratio Used For in Equipment Lending?
Debt service coverage ratio is the name lenders often use for the same idea, especially in equipment and commercial lending. In equipment lending, it shows whether the cash the business already produces can carry the new machine's payment before the machine adds any income of its own.
Illustration only, invented figures: a salon with $52,000 of yearly operating cash flow and $9,000 of yearly payments on chairs it already financed considers a $25,000 remodel loan at an invented annual rate of 15% over 18 months. The payment is about $1,560 a month, $18,715 a year, and the ratio comes to about 1.88 (our arithmetic). A shorter term raises the payment and lowers the ratio.
Limits of the Ratio Estimate
The calculator returns a payment from the numbers typed in, and the ratio is only as good as the cash flow figure used. It does not know the business's seasons, taxes, owner draws or the way a particular lender adjusts cash flow. It is not an offer, a quote or an approval.
A merchant cash advance has no fixed payment or interest rate, so it does not fit the calculator. For an advance already in place, add a year of its estimated remittances to the debt payments. The cash advance page explains collection.
Where Broome County, NY Trades Fit This Check
Payment checks matter most for trades with thin cushions between sales and costs, and Broome County, NY has many small employers: 1,897 of its 4,001 employer establishments, or 47.4%, had fewer than five employees in 2023 (CBP). Restaurants and other eating places numbered 370 employers and retail trade 637.
The term loan page and the equipment page cover the loans this calculator prices.
By Harborpark Funding Group · Updated