Which earnings support your commercial mortgage

A business owner presents profitable accounts and asks how much the business can borrow to buy its premises. The answer can change substantially depending on which earnings are used and what still has to be paid from them.

The exercise begins with reported profit, but it cannot finish with an optimistic list of add-backs. The lender needs a defensible assessment of continuing earnings. The owner also needs to know whether the business will retain enough cash after tax, equipment investment, working capital and all debt payments. Those calculations are related, but they need not produce the same conclusion.

Start with a figure that can be reconciled

EBITDA means earnings before interest, tax, depreciation and amortisation. It is an earnings measure. It does not deduct loan principal repayments, and removing depreciation from the calculation does not remove the future need to replace equipment.

Adjusted EBITDA then allows specified changes to the reported earnings. The important questions are what each adjustment represents, whether the cost or income will recur, and whether the proposed business and property structure actually removes it. A lender may reject a plausible commercial adjustment if the evidence is insufficient or its assessment method differs.

Allica’s commercial mortgage guide dated 24 September 2026 gives a current lender-specific example: its healthcare owner-operator criteria refer to adjusted EBITDA and distinguish experienced operators from first-time buyers. The guide also differentiates fixed-rate repayment tests from variable-rate tests. Those are Allica’s published criteria for the stated categories, not one calculation applicable to every commercial mortgage. [1]

Reconstruct the earnings after buying the premises

Consider a hypothetical trading company buying the freehold premises it currently rents from an unrelated landlord. The company itself will borrow and own the property. Assume its recorded annual profit before tax is £120,000 after £18,000 of finance interest and £22,000 depreciation, with no amortisation. Reported EBITDA is therefore £160,000.

The company proposes adjustments to continuing earnings. A £12,000 legal bill related to a completed, exceptional dispute will not recur. Director remuneration includes £18,000 above the evidenced, fully costed amount needed for continuing management. Annual rent of £48,000 will cease after purchase, but £15,000 of additional annual property operating costs must be recognised. The £15,000 excludes the capital expenditure modelled later. These assumptions are accepted solely for this constructed example.

Each row needs evidence. The legal invoice and circumstances must support treating the £12,000 as exceptional. If similar disputes recur, adding the cost back disguises an operating expense. The remuneration adjustment assumes the required work will still be performed at the remaining cost, including employer costs. Removing a director’s whole salary while assuming their work continues would overstate earnings.

For the £18,000 remuneration saving, I would want to know who will perform the work, their employment cost and whether the owner has actually agreed a sustainable reduction. There is also a distinction between a lender declining to recognise the saving and the business failing to achieve it. The first changes the underwriting assessment; the second changes the cash the business will generate. Neither should be concealed by an adjustment to the model.

The rent adjustment depends on the transaction structure. In this example, the third-party lease ends and the same company buys the property. If a separate property company buys it and continues charging rent to the trading business, the assessment must reconcile both companies, the lease and intercompany payments. The same rental saving cannot be used twice. If the lease or occupation overlaps, the cash forecast must also allow for the period when both rent and mortgage payments are due.

Allica’s earlier care-home commentary provides a useful sector-specific reminder: temporary grant income could inflate the apparent performance of a business. The broader credit judgement is to examine exceptional income as critically as exceptional costs. That historical observation does not establish that today’s earnings contain the same issue. [2]

Calculate the payments before judging the cover

Assume the proposed mortgage is £1 million, repaid monthly over 20 years at an illustrative annual nominal rate of 7%, using a monthly rate of 7% divided by 12. The standard amortising calculation produces a payment of approximately £7,753 a month, or £93,036 a year. There is no balloon payment. Fees are paid separately and the amount borrowed remains £1 million.

The business also has existing annual debt payments of £30,000, covering both interest and principal, including the £18,000 interest added back earlier. Total annual debt service is therefore approximately £123,036. Dividing the assumed £223,000 adjusted EBITDA by that amount gives earnings cover of approximately 1.81 times. Existing debt has not disappeared because its interest was added back to profit: its full payments remain in the denominator.

That ratio is an illustrative earnings comparison. A proposed lender may use another definition, a stressed mortgage payment or a different treatment of existing commitments. It also still has to assess property value, leverage, borrower conduct and the rest of the credit case. The ratio alone does not establish the available loan.

Then follow the cash the business still needs

Now assume annual cash tax payments of £30,000, maintenance capital expenditure of £25,000 and £40,000 of additional working capital as stock and receivables grow. These are separately specified cash assumptions, not amounts calculated from the £223,000 EBITDA. The tax figure in particular requires the accountant’s forecast; it cannot be obtained by applying a corporation-tax rate to EBITDA.

The £25,000 capital expenditure is not a second charge for depreciation. Depreciation was removed when calculating EBITDA; the cash assessment now recognises the assumed expenditure needed to maintain operations. Working capital measures a different use of money: sales recorded in earnings may still be tied up in customer balances or stock, after allowing for supplier funding.

The earnings calculation leaves a margin above scheduled debt payments. The cash calculation leaves about £414 a month before distributions and other movements. Cash cover is approximately 1.04 times. If the owner needs dividends for living costs, those withdrawals must also be considered. Any opening cash reserve is a separate resource that may absorb pressure for a time; it is not recurring annual cash generation.

Working capital changes the conclusion across years

The £40,000 is an increase in net working capital during the forecast year, not the business’s entire stock and debtor balance. It is a use of cash as operating balances expand. Before that increase, the example generates £168,000 after the assumed tax and maintenance expenditure. After total debt payments of £123,036, that would leave £44,964 if no further net working capital were required.

If the £40,000 increase funds a one-off step up in trading and the resulting balances then stabilise, the following year does not automatically require another £40,000. Cash could recover to the £44,964 annual surplus, holding earnings and all other assumptions unchanged. The original £40,000 remains invested in the business; it has not been received back merely because there is no further increase.

If continuing growth requires a further £40,000 each year, the approximately £4,964 surplus persists under the same assumptions. Calling each annual increase temporary would obscure a continuing funding requirement. An actual £40,000 reduction in net working capital would instead release cash, subject to collection and stock realisation. That release would be a balance-sheet movement, rather than an improvement in recurring earnings, and should not be treated as an annual source of mortgage payments.

Seasonality creates another possibility. The annual increase might be £40,000 while the peak cash absorbed during the year is much higher. The monthly forecast must show how stock, debtors and creditors move, the maximum funding requirement and when it reduces. A revolving facility could suit a demonstrably self-liquidating seasonal cycle. A permanent operating investment needs funding that can remain available, and its own repayments or availability conditions must be included in the combined assessment.

The remuneration assumption also matters to this cash margin. If the £18,000 saving does not materialise, holding other cash payments unchanged reduces pre-debt cash from £128,000 to £110,000. The £4,964 surplus becomes an approximately £13,036 annual shortfall. This sensitivity assumes unchanged cash tax for comparison; a live forecast should update that figure and any other affected costs. The adjustment therefore requires evidence before the owner relies on it to support the purchase.

The downside should change the decision if the numbers require it

At a 9% annual nominal mortgage rate over the same 20-year amortisation period, with the same monthly calculation, annual mortgage payments would be about £107,967. Including the existing £30,000 commitment, total debt service becomes £137,967. Holding the assumed £128,000 pre-debt cash unchanged produces an annual shortfall of approximately £9,967. This is a sensitivity, not an interest-rate forecast; a live assessment should update tax and other affected assumptions as well.

The 9% sensitivity identifies a financing requirement that needs an answer before completion. If working-capital absorption genuinely stabilises after the growth year, the timing of that recovery and the funds available through the intervening period matter. If further cash is absorbed each year, extending temporary funding will not establish a sustainable repayment position. The business may need a smaller mortgage, more equity, an appropriately funded expansion plan or a different purchase timetable. An interest-only period changes near-term payments, but its end date and subsequent capital repayments still need modelling.

I would take the accountant’s reconciliation, recent management accounts and a monthly cash forecast to the funding discussion. Every material add-back should have a supporting explanation, and the forecast should show the acquisition period as well as stabilised trading. The annual average can conceal a cash deficit in the month when tax, stock and debt payments coincide.

The EAS Finance Workspace can help compare borrowing, repayment and cash assumptions. It cannot establish that a lender will accept an adjustment simply because it has been entered into a model. The strongest proposal explains which earnings are sustainable and demonstrates how the business will meet its payments while continuing to operate properly.

This article concerns business-purpose commercial mortgages and uses illustrative calculations. Lender assessment methods and terms differ. Accounting, tax and ownership assumptions require appropriate professional confirmation. EAS Finance is a credit broker, not a lender.