Fixed charge coverage ratio (FCCR)

A buyer financing an acquisition may meet the FCCR in a lender’s assessment or a loan covenant. BDC says most banks calculate it, and that it is a measure of solvency that looks at additional variables to offer a more nuanced view. BDC uses this formula: (EBITDA less unfunded capital expenditures and taxes) divided by (cash interest expense plus mandatory debt repayment).

Definitions differ by lender

BDC notes that some lenders adjust EBITDA for extraordinary items or gains and losses on asset sales, or deduct rent, and that many, like BDC, also deduct dividends (if applicable). It also says that including capital lease expenses in a debt service coverage calculation produces the fixed-charge coverage ratio. Compare debt service coverage ratio.

What to ask the lender

• The exact formula the lender uses, in writing
• Whether it is tested as a loan covenant, and how often
• Whether rent, dividends or lease payments are counted

For the wider picture, see how to finance a business acquisition in Canada.