What is CADS?

Cash available for debt service (CADS) is the cash a business produces in a year that is free to pay its lenders. It starts from EBITDA and takes away the cash costs that come before the lender: replacing worn equipment, paying tax, funding growth in working capital, and anything else the business is obliged to pay. What is left is the number a lender divides by your annual loan payments to get the Debt Service Coverage Ratio (DSCR).

Buyers tend to skip this step and use EBITDA. Lenders do not, and the difference is rarely small. This article walks through the four deductions on one business, then spends time on the one that causes the most errors: working capital, and which way its sign goes.

The bridge from EBITDA to CADS

The figures below are a worked example. The business is a commercial services company with revenue of $2.8M and Adjusted EBITDA of $420K, bought with a $1.5M senior loan at an assumed 10.5% over 10 years. It is the same deal used in our article on DSCR for business acquisitions.

EBITDA says this business has $420K to work with. The lender's number is $320K, about a quarter lower. Against annual payments of $242.9K on the senior loan, that is the difference between coverage of 1.73× and coverage of 1.32×.

The idea is not peculiar to any one lender. The SBA's rulebook for 7(a) loans, SOP 50 10 8.1 (effective 1 October 2026), defines the historical coverage ratio for an acquisition as EBITDA over the combined debt service after the transaction, then lets the lender adjust it with a written justification for each item: unfunded capital expenditures, non-recurring income, distributions, distributions for S-Corp taxes, seller discretionary expenses and ownership compensation (Appendix 15, Para. C.2). Two of the four CADS deductions are on that list by name. Working capital is not, and the lender's own credit policy decides whether it comes out; most take it out. The SBA publishes the full document.

Deduction one: maintenance capex

Maintenance capex is what the business must spend to stay as it is: the same fleet, the same machines, the same capacity. Growth capex, spending you choose in order to get bigger, is a separate decision and is usually left out.

Two checks keep this number honest. First, compare it with depreciation and with several years of fixed-asset additions. A seller who has spent $40K a year on equipment for five years will not persuade a lender that the right figure going forward is $10K. Second, watch for capex that has been deferred. Old equipment in the year before a sale means a bill in the year after it.

One caution on double counting. If a truck is bought with an equipment loan, the payments on that loan are debt service and sit in the denominator of DSCR. Do not also deduct the truck's price from CADS. Deduct what is paid from the business's own cash, which is why lenders call it unfunded capex.

Deduction two: cash taxes

Use the tax the business will pay in cash, not the accounting expense. Two details matter on an acquisition.

Interest is deductible, so the tax bill depends on the debt you are sizing. In the example, EBITDA of $420K less $60K of depreciation and about $153K of first-year interest leaves pre-tax income near $207K. At an assumed 22% rate, tax is about $45K. Change the loan and the tax changes with it.

If the business is a pass-through entity, the company pays no income tax itself, but the owners do, and they take distributions to cover it. That cash leaves the business just the same. A model that shows zero tax because the entity is an S corporation overstates CADS.

Deduction three: working capital, and its sign

This is the line where models go wrong, usually in the direction that flatters the deal.

Working capital here means the operating items: receivables plus inventory, less payables and accrued liabilities. Leave out cash and leave out debt. An increase in that balance over the year uses cash. A decrease releases it.

In the example, revenue grows from $2.8M to $2.95M and working capital stays at about 10% of revenue:

Three conventions keep the sign straight.

• An increase is a deduction. The business collected $10K less than it billed, bought $10K more stock than it sold, and was helped by $5K of extra credit from suppliers. Net, $15K of earnings never became cash. CADS falls by $15K.
• Enter the outflow as a positive number in a line that is subtracted. The usual error is typing the change as −15 into a field that is already subtracted. Two negatives make a positive, and CADS reads $350K. The error is twice the size of the item: coverage shows 1.44× when the true figure is 1.32×.
• Treat a release with suspicion. If working capital falls, the arithmetic adds cash. A lender will ask whether it can happen again. Collecting old receivables faster is a one-time gain. Stretching suppliers is a loan from them that ends when they object. A careful model sets a release to zero unless there is a reason it repeats.

Two more points. A business that is not growing and has no seasonal swing at year end has a working capital change near zero, and zero is a fair entry. And the change in working capital is not the working capital peg. The peg is a balance: the level of working capital the seller must deliver at closing. The CADS deduction is a flow: how much that level moves in a year. Comparing one with the other is comparing a level with a change, and it will always look wrong.

Deduction four: other required outflows

This line catches cash the business must pay that is in neither EBITDA nor debt service. Common examples are owner distributions beyond the salary already counted, and lease or rent payments that were added back or left out of EBITDA. On many small deals the line is zero. Its job is to make you ask the question.

What CADS leaves out, on purpose

CADS does not deduct interest or principal. Those are the debt service it is being compared with. It does not deduct depreciation or amortization, which are not cash. And it does not deduct growth capex or acquisitions, which the owner can choose not to make in a hard year.

Subtract annual debt service from CADS and you have free cash flow after debt service: in the example, $320K less $242.9K, or about $77K. That is what remains for the owner, for growth and for mistakes.

If CADS is negative, coverage is negative. Report it that way. A ratio floored at zero hides how far the business is from paying its lender.

Educational guide, not advice. This guide is general information, not investment, legal, tax, accounting, lending or valuation advice. Rules, ratios, prices and worked figures are stated as of the date shown, are drawn from public sources and our own experience, and can be out of date or wrong; they are not a substitute for a lender's, regulator's or program's current rules. Verify any figure with its primary source and a qualified professional before acting on it.

How Acquiror AI does this

The Financing module in Acquiror AI computes DSCR on CADS, using the definition above. A financing scenario linked to your Quality of Earnings (QoE) work starts from the Adjusted EBITDA of the locked period, and maintenance capex, cash taxes, the working capital adjustment and other outflows are each their own line. The standard stress tests push each deduction up and earnings down, one at a time and then together, so you can see which deduction the structure is most exposed to. A negative CADS reads as a negative DSCR everywhere it appears.

The takeaway

EBITDA is what the business earns before the unavoidable cash costs. CADS is what it has after them. Build the bridge one line at a time, get the working capital sign right, and present the lender with the number they were going to calculate anyway.