Diligence
CFADS
CFADS is the cash left to pay lenders after the business has paid for everything it needs to keep running. It is the number that sets your real borrowing ceiling, and it is usually far below EBITDA.
Also called cash flow available for debt service · cash available for debt service · debt service capacity
EBITDA is the headline and CFADS is the money. On this business the gap is nearly half.
| Step | Running amount |
|---|---|
| EBITDA | £2m |
| Less cash tax | £1.75m |
| Less maintenance capex | £1.3m |
| CFADS | £1.11m |
Illustrative build-up on £2m EBITDA, consistent with the worked example on /library/dscr. Derived arithmetic.
What the number means
CFADS is the cash a business has left, after paying for everything it needs to keep operating, with which to pay its lenders. It sits at the centre of debt-service testing because it answers the question a lender is really asking: not how profitable is this business, but how much cash can it hand over each year without breaking.
It is the numerator of the debt service cover ratio. Where DSCR is the test, CFADS is the thing being tested, which is why the definition of CFADS in a facility agreement often matters more than the ratio the covenant is set at.
The build-up
The construction starts at EBITDA and works down. Cash tax comes out first, because tax is unavoidable and is paid before lenders. Then maintenance capital expenditure, being the spend required to keep the existing asset base functioning rather than to grow it. Then the movement in working capital, which can be a deduction or an addition depending on the direction.
On a business with £2m of EBITDA paying £250k of cash tax, £450k of maintenance capex and absorbing £190k into working capital, CFADS lands at around £1.11m, a little over half where it started.
Some facilities add further deductions: permitted dividends, exceptional items, or the cash cost of an equity cure. Others add items back, most commonly a genuine equity injection. Each variation is negotiated, and each moves the covenant without moving the ratio.
Some deductions are never argued and some are the whole negotiation. Capex is where the money is.
| Deduction | How contested |
|---|---|
| Cash tax | Standard |
| Working capital movement | Definition matters |
| Permitted dividends | 35–60 on the scale |
| Exceptional items | 50–72 on the scale |
| Capex: maintenance or total | The main argument |
Market convention at £3-15m. Definitions are negotiated deal by deal.
Maintenance capex against total capex
This is the argument that matters most, and it is worth being clear about why.
Maintenance capex is what the business must spend to stand still: replacing worn machinery, renewing vehicles, keeping systems supported. Growth capex is discretionary spend to expand capacity. Deducting only maintenance capex says the business can pay lenders from what it generates while remaining intact. Deducting total capex says it must pay lenders from what is left after growing too.
A lender prefers total capex because it is objective and appears in the accounts. A borrower prefers maintenance capex because it reflects the obligation rather than the ambition. On a capital-intensive business the difference can be several hundred thousand pounds a year, which flows straight through the cover ratio.
Where the split is agreed, expect the lender to want it defined rather than asserted: a schedule of maintenance capex by asset class, or a cap expressed as a percentage of revenue or depreciation, so the category cannot expand quietly.
Working capital, and why growth hurts
Working capital is the deduction that produces the most counterintuitive outcomes, because it turns growth into a cash cost.
A business winning more work bills more, which means larger debtors, and holds more stock to service it. Both absorb cash before the profit arrives. So a company trading well and growing fast can generate strong EBITDA and weak CFADS at the same time, and fail a cash-based covenant while passing an earnings-based one.
That is not a modelling error, it is the correct answer: the business does have less cash available, because the cash is in debtors and stock. But it does mean a fast-growing borrower should model CFADS rather than EBITDA before agreeing a debt service covenant, and should expect to explain the pattern to a lender who may read a cash squeeze as a warning rather than a symptom of success.
For seasonal businesses the definition matters too. A test date falling at the peak of the working capital cycle produces a materially different figure from one falling at the trough, so where the covenant is tested and on what basis is worth negotiating alongside the level.
The gap between EBITDA and CFADS is a property of the business. Capital intensity and growth both widen it.
| Business profile | CFADS as % of EBITDA |
|---|---|
| Asset-light services | 75% |
| Stable distributor | 60% |
| Capital-intensive | 50% |
| Fast-growing | 40% |
Illustrative CFADS as a percentage of EBITDA by business profile. Derived arithmetic, not measured data.
How it differs from EBITDA and free cash flow
Three measures, frequently confused, each answering a different question.
EBITDA describes operating profitability before capital structure and before the cash cost of running the business. It is useful for comparing businesses and for setting leverage multiples, and useless for testing whether debt can be serviced.
CFADS describes what is available to pay lenders, so it is struck before debt service and after everything else. Free cash flow, as the term is usually used, is struck after debt service, so it is what remains for shareholders. The order matters: CFADS is the input to the debt-service test, free cash flow is the output.
A business can have healthy EBITDA, adequate CFADS and negative free cash flow simultaneously, which simply means it is servicing its debt and has nothing left over. That is a normal condition for a leveraged business and is not, in itself, a problem.
Where the gap is widest
The distance between EBITDA and CFADS is a property of the business rather than of the deal, and knowing where you sit tells you how much debt the business can really carry.
An asset-light services business with stable working capital and little capex retains most of its EBITDA as CFADS. A distributor with steady stock and debtor cycles retains rather less. A capital-intensive manufacturer with real maintenance obligations retains less again. A fast-growing business absorbing cash into working capital retains the least, sometimes dramatically so, despite trading well.
This is why two businesses with identical EBITDA can support very different amounts of debt, and why a leverage multiple alone is a poor guide to capacity. The multiple describes what a lender will underwrite; CFADS describes what the business can pay.
What the definition decides
The gap between two definitions is only visible on your own numbers, and it is visible before the term sheet is signed rather than after.
Against the last two years of actuals, the lender's proposed definition and the one a borrower would prefer produce two different numbers. Where the gap is large, that tells you exactly which clause to spend your negotiating capital on, and it is usually the capex definition.
Then run it forward against the amortisation profile. A structure sized on a leverage multiple can fail its cover test on day one, and the moment to discover that is before signing rather than at the first compliance certificate. Where the answer is tight, the most effective structural lever is a slower repayment profile, because it reduces the denominator directly rather than arguing about the numerator.
Common questions
What does CFADS stand for?
Cash flow available for debt service. It is the cash left after the business has paid for everything it needs to keep operating, and it is the money with which lenders are paid. It forms the numerator of the debt service cover ratio.
How do you calculate CFADS?
Start at EBITDA and deduct cash tax, maintenance capital expenditure and the movement in working capital. Some facilities also deduct permitted dividends or exceptional items. On £2m of EBITDA with £250k of tax, £450k of maintenance capex and £190k absorbed into working capital, CFADS is around £1.11m.
Why is CFADS so much lower than EBITDA?
Because EBITDA is struck before tax, before the capital spend needed to keep the asset base working, and before the cash tied up in debtors and stock. All three are real cash obligations that rank ahead of lenders, so the figure available for debt service is materially smaller. On many businesses it is a little over half.
What is the difference between maintenance and total capex in a CFADS definition?
Maintenance capex is the spend needed to keep the existing asset base working; total capex includes growth investment. Deducting only maintenance says the business can service debt while remaining intact; deducting total says it must service debt after growing too. On a capital-intensive business the difference can be several hundred thousand pounds a year, flowing straight through the cover ratio.
Can a growing business have weak CFADS?
Yes, and it is common. Growth absorbs cash into debtors and stock before the profit arrives, so a company trading well can show strong EBITDA and weak CFADS at once, passing an earnings-based covenant while failing a cash-based one. It is the correct answer rather than a modelling error, but it needs explaining to a lender who may read it as a warning.
Is CFADS the same as free cash flow?
No. CFADS is struck before debt service and is what is available to pay lenders. Free cash flow is usually struck after debt service and is what remains for shareholders. CFADS is the input to the debt-service test; free cash flow is the output.
Why does the CFADS definition matter more than the ratio?
Because the definition moves the numerator without anyone touching the covenant. A facility with a debt service cover set a little above 1.0 times and a generous CFADS definition can be considerably easier to comply with than one at the same ratio deducting total capex and permitted dividends. The definition comes before the level.
How should I prepare before agreeing a CFADS definition?
It only resolves on your last two years of actuals, run under both the lender's proposed definition and the one you would prefer, and see how far apart they are. That tells you which clause deserves your negotiating capital, usually the capex definition. Then run it forward against the amortisation profile, because a structure sized on leverage alone can fail its cover test on day one.
The full treatment sits in the guide: how much can my business borrow.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.