What is the fixed charge coverage ratio (FCCR)?

How lenders use it

Lenders use FCCR in the US as a covenant in loan agreements, and in asset-based and cash-flow lending as a test of how much room the business has. The agreement states the exact formula. The lender then tests the ratio each quarter or each year using the borrower's financial statements.

The formula differs between agreements, so the credit team reads the definition and does not assume it. A common US form is EBITDA, minus unfinanced capital spending and cash taxes, divided by cash interest plus scheduled principal. Some agreements also deduct dividends or owner draws. Others add rent or lease payments to both the top and the bottom of the fraction.

A typical minimum is between 1.1 and 1.25, but it depends on the lender and the deal. If the ratio falls below the minimum, the borrower breaches the covenant. The lender can then ask for a fix, change the terms or, in serious cases, call the loan.

FCCR is stricter than debt service coverage because it takes out the spending a business must make to keep going, such as machines and taxes.

Worked example

Example only. A business has EBITDA of $500,000. It spends $60,000 on equipment from its own cash and pays $40,000 in cash taxes. That leaves $400,000.

Its fixed charges are $120,000 of interest and $130,000 of scheduled loan principal. That is $250,000. The ratio is 400,000 divided by 250,000, which is 1.6. If the covenant is 1.25, the borrower passes with room to spare.

Common confusions

FCCR and the debt service coverage ratio (DSCR) are close but not the same. DSCR divides cash flow by debt payments only. FCCR also takes out capital spending and taxes, and often counts rent or lease payments. For the same business, FCCR is usually lower.

There is no single FCCR formula. A textbook version uses earnings before interest and tax plus fixed charges. A credit agreement version is usually more cash-based. Always check which one the document uses.

In UK lending the same idea is often called fixed charge cover. It should not be mixed up with a fixed charge, which is a type of security.

Questions lenders ask

What is the difference between FCCR and DSCR?

DSCR divides cash flow by loan payments. FCCR adds other fixed costs to the test, usually by taking out capital spending and taxes from the cash flow and sometimes counting rent. FCCR is the tougher test.

What is a good FCCR?

Above 1.0 means the business covers its fixed charges. Lenders often ask for 1.1 to 1.25 or more. The right level depends on the industry, the lender and how steady the earnings are.

How do you calculate FCCR?

Take the cash flow the agreement defines, usually EBITDA less unfinanced capital spending and cash taxes. Divide it by the fixed charges the agreement defines, usually cash interest plus scheduled principal. Use the figures for the same period.

What happens if a borrower breaches an FCCR covenant?

The lender can waive the breach, reset the covenant for a fee, add terms or declare a default. The loan agreement sets the options. Most lenders talk to the borrower first.

Debt service coverage ratio: Cash earned against loan payments due
Cash flow lending: Lending against earnings, not against assets
Management accounts: Up-to-date internal financial reports
Five Cs of credit: Five headings a credit team uses to judge a loan

This page is general information for lenders. It is not legal, tax or credit advice.