What Do Commercial Lenders Look for in a Limited Company's Accounts?

Revenue trend and gross margin

The first thing a lender looks at in a set of accounts is turnover — not just the absolute level, but the direction of travel over two to three years. A growing or stable revenue line suggests demand exists; a declining one prompts questions about whether the business can sustain its obligations. Gross margin (revenue minus direct costs) is examined alongside turnover, because a business with shrinking margins may be under competitive or input-cost pressure even if headline sales are flat.

Lenders are also alert to revenue that is highly concentrated in one or two customers, which creates concentration risk. Where accounts do not show customer concentration (they rarely do at this level), lenders may ask directors to address it in a covering note or credit narrative.

EBITDA and debt service cover

EBITDA — earnings before interest, tax, depreciation, and amortisation — is a proxy for the operating cash generated by the business before financing and accounting adjustments. Lenders use it as a normalised measure of earning power because it strips out the effect of different capital structures and depreciation policies. For term lending, most commercial lenders require debt service cover of at least 1.25x, meaning EBITDA must comfortably exceed the annual principal and interest repayment. A business generating £200,000 EBITDA and seeking to borrow at £40,000 per year in repayments would sit at 5x cover — well above the threshold. These are illustrative ratios, not a quote or commitment.

Director remuneration is a common adjustment. Where a director is paid well above or below market rate, lenders may normalise the salary line to assess underlying profitability on a more comparable basis.

Balance sheet: assets, liabilities, and net worth

The balance sheet tells a lender what the business owns and owes at a point in time. Key items include tangible assets (property, plant, equipment), debtors (what customers owe), and creditors (what is owed to suppliers and HMRC). Lenders pay particular attention to the creditor position — a large HMRC liability for PAYE or VAT arrears is a significant concern because HMRC is a preferential creditor in insolvency.

Net assets (total assets minus total liabilities) give a broad sense of balance sheet strength. A business with substantial net assets has cushion against losses; a business with a net liability position (liabilities exceeding assets) will face harder questions about solvency and the basis on which it is continuing to trade. Director loan accounts — amounts owed to or from the company by directors — are scrutinised to ensure the company's cash position is not artificially inflated or depleted.

Cash flow and working capital

Profitability and cash generation are not the same thing. A business can be profitable on an accruals basis while struggling for cash if it has long debtor days or has grown quickly and tied up capital in stock. Many lenders examine debtor days (the average time taken to collect invoices) and creditor days (how quickly the company pays suppliers) as indicators of working capital health. If these ratios are deteriorating year-on-year, a lender will want to understand why.

Where full statutory accounts include a cash flow statement, lenders use it to reconcile profit to actual cash movements. Small company accounts filed at Companies House may not include a cash flow statement, in which case lenders may ask for bank statements covering the same period to verify the cash position independently.