Interest
What does it mean
Interest is an expense on a borrower’s Income Statement. Interest represents the cost of the borrowed funds in a customers business. Â
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Why does it matter
Interest expense for a customer is Revenue for a bank. Beyond that, due to one of a banker’s primary responsibilities being to gauge a customer’s ability to repay a loan, knowing their interest expense is extremely important. In the EBITDA calculation, interest expense is added back because ultimately the borrower’s loan payments (which also includes interest expense) will be compared to the EBITDA figure. If Interest Expense was not added back, it would be like the customer would have to pay Principal + Interest + Interest.
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Other Relevant Terms
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