Commercial Finance Affordability Checker

How Commercial Hospitality Lending Actually Works

Buying a hotel, B&B or guest house is not a residential mortgage with a bigger number. A commercial lender is underwriting a trading business, so the question is never simply what the building is worth — it is whether the profit the business produces can comfortably service the debt. That means every hospitality loan is capped twice over. The first cap is loan-to-value: most commercial lenders will advance somewhere between 60% and 70% of the value of a going-concern hospitality property, so a deposit of 30–40% is normal. The second cap, and usually the binding one, is debt service cover: the lender divides your adjusted EBITDA by the annual loan repayments and needs the result to clear a minimum, typically 1.3× to 1.5×. Whichever cap produces the smaller loan is the loan you will be offered, and this checker shows you both so you know which one is really limiting the deal.

What Is DSCR and Why Does It Decide the Deal?

The debt service coverage ratio is annual profit divided by annual debt service. A DSCR of 1.4× means the business generates £1.40 of profit for every £1 of loan repayment — a 40% cushion before the loan stops being serviceable. Lenders insist on that cushion because hospitality trading is seasonal and volatile: a wet summer, a boiler replacement or a competitor opening nearby can move profit by more than 10% in a year. Two consequences follow. First, in a strong-profit business the LTV cap will bind and you simply need the deposit; in a weak-profit business the DSCR cap binds and no deposit will unlock more debt, because the trade cannot support it. Second, DSCR is highly sensitive to the interest rate — a two-point rate rise on an amortising commercial loan can push a 1.4× ratio below the covenant threshold, which is why the stress table above matters as much as the headline figure.

Adjusted EBITDA: The Number Lenders Underwrite

The profit figure that matters is not the bottom line on the accounts. Lenders work from adjusted EBITDA — earnings before interest, tax, depreciation and amortisation, with genuine one-offs and owner-specific costs added back. Legitimate add-backs typically include the current owner's drawings above a market salary, private motor and travel run through the business, one-off legal or refurbishment costs, and any family member paid above the going rate. Two cautions. Add-backs must be evidenced from the accounts, not asserted, and a lender will deduct a realistic manager's salary if you do not intend to work in the business full time. Equally important: a capital expenditure reserve for rolling refurbishment is a real cost that never appears in EBITDA, so build it into your own numbers even though the lender's ratio ignores it. Cost the team properly with the Staff Cost Planner before you settle on a profit figure.

Preparing to Approach a Lender

Lenders fund evidence, not optimism. Arrive with three years of accounts and VAT returns, occupancy and rate reports from the booking system, a schedule of your add-backs with supporting entries, a personal asset and liability statement, proof of deposit, and a business plan showing what you will do differently. Test the deal at a stressed rate before you commit, and confirm the surplus after debt service still funds refurbishment, tax and your own living costs — a loan that only just passes DSCR leaves nothing for either. Then sense-check the wider picture: price the asking price against live comparables with the Market Comparison Tool, judge the deal itself with the Deal Analyser, confirm the occupancy needed with the Break-Even Calculator, check the monthly timing with the Cash Flow Forecast, add transaction tax with the Stamp Duty Calculator, and if you are weighing tenure, run the Lease vs Freehold Calculator. Then browse hospitality properties for sale or explore all the free AI tools.