What Is Depreciation in Business Lending? | Business Lending Glossary
Learn what depreciation means for business borrowers, how it affects collateral values and income statements, and why lenders add it back to EBITDA.
Definition
The gradual reduction in the value of a tangible asset over time due to use, wear, and obsolescence.
Explanation
Depreciation is recorded as a non-cash expense on the income statement, reducing taxable income each year without an equivalent cash outflow. For lenders evaluating equipment or real estate as collateral, understanding depreciation is important for determining current asset value versus original purchase price. Common depreciation methods include straight-line, declining balance, and MACRS for tax purposes.
Example
A restaurant purchases commercial kitchen equipment for $60,000 and depreciates it straight-line over 7 years, recording $8,571 in annual depreciation expense.
Why It Matters
Depreciation affects both the book value of collateral and EBITDA-based underwriting metrics, so lenders often add it back when assessing true cash generation capacity.
Frequently asked questions
Does depreciation affect loan eligibility?
Depreciation reduces net income on paper but lenders often add it back to calculate EBITDA, which can actually improve how your cash flow looks during underwriting.
