FCCR became an afterthought for many over the last decade. Today, it’s a limiting factor. By pressure-testing FCCR, borrowers can better assess how much debt their business can manage (their debt capacity) and prevent financing surprises.
What is FCCR?
FCCR evaluates a company’s ability to cover its obligatory costs. Costs that must be satisfied to keep the business up-and-running and in good standing, or its “fixed” costs – including taxes, capital expenditures (e.g., for facility/equipment upkeep) and financing principal & interest payments.
The ability to cover these costs is measured by the ratio of operating profit (EBITDA) to fixed costs. Lenders set a minimum threshold, typically just above 1.0 – as less than 1.0 would mean profits are less than fixed costs, and the business risks insufficient funding to meet its obligations.
More Than a Metric
FCCR addresses the critical lending question: “Will the borrower make enough money to pay me back on time?” (i.e., via scheduled principal and interest payments). As a result, lenders use FCCR extensively – during underwriting, in loan covenants, and as part of internal tracking systems to assess portfolio risk.
FCCR is not your average metric. It’s nearly a full cash flow statement in a single formula – capturing what lenders truly care about. It’s also an inescapable economic reality – a sustainable business must (eventually) generate enough profits to meet its financial obligations.