Cash Flow Analysis for Private Credit: What Lenders Actually Look At

Every private credit interview will test whether you understand cash flow. Not in the "walk me through a DCF" sense. In the "tell me whether this business actually generates enough cash to service its debt" sense.

EBITDA is a starting point, not an answer. The lender's job is to figure out how much of that EBITDA actually converts to cash the business can use to pay interest, repay principal, and survive a downturn. That process — bridging from reported EBITDA to usable free cash flow — is the most important technical skill in private credit.

Why EBITDA Alone Is Dangerous

EBITDA tells you what the business earns before interest, taxes, depreciation, and amortization. It is a proxy for operating cash generation. But it ignores several things that directly affect whether the lender gets paid:

• Maintenance capex — the capital the business must spend just to maintain its current operations. A logistics company with an aging fleet might have $30M of EBITDA but $12M of mandatory fleet replacement. The lender sees $18M.
• Working capital swings — a growing business that extends 60-day payment terms to customers while paying suppliers in 30 days is funding that gap with cash. EBITDA does not capture it.
• Cash taxes — tax shields, NOLs, and timing differences mean EBITDA overstates cash available for debt service in some years and understates it in others.
• One-time items and addbacks — restructuring costs, integration expenses, and "normalizing" adjustments can inflate EBITDA beyond what the business actually generates on a recurring basis.

A candidate who says "EBITDA is $50M and leverage is 5x, so the debt is $250M" is thinking like a banker. A candidate who says "EBITDA is $50M, but after maintenance capex, working capital absorption, and cash taxes, free cash flow to service debt is closer to $30M" is thinking like a lender. That distinction matters in every interview.

The Cash Conversion Bridge

The framework lenders use to go from EBITDA to cash available for debt service looks like this:

EBITDA (reported or adjusted) — Maintenance capex — Cash taxes — Cash interest (for levered FCF) +/— Change in working capital — Other cash costs not captured in EBITDA (rent if not in EBITDA, pension contributions, litigation settlements) = Free Cash Flow available for debt service

The cash conversion rate — FCF / EBITDA — is one of the most telling metrics in credit analysis. A business converting 60-70% of EBITDA to free cash flow is strong. A business converting 30-40% has a cash flow problem that leverage will amplify.

In an interview, you should be able to walk through this bridge without being prompted. If someone gives you an EBITDA number and asks you to assess debt capacity, your first move should be to ask about (or estimate) the items that sit between EBITDA and cash.

Maintenance Capex vs Growth Capex

This distinction trips up candidates constantly. Total capex is reported on the cash flow statement. But not all of it is discretionary.

Maintenance capex is what the business must spend to keep its current asset base functioning — replacing equipment, repairing facilities, maintaining IT infrastructure. This is non-negotiable. If the business stops spending it, the revenue base erodes.

Growth capex is investment in new capacity, new geographies, new product lines. It is (theoretically) discretionary. In a downside scenario, the borrower can cut growth capex to preserve cash.

Why the lender cares: maintenance capex reduces the cash available for debt service. Growth capex is a choice the borrower is making with cash that could otherwise go to lenders. When you size debt, you use cash flow after maintenance capex, not after total capex.

The problem is that companies rarely disclose the split. Management will claim most capex is "growth." The lender's job is to challenge that.

Rules of thumb vary by sector. Asset-heavy businesses (manufacturing, logistics, healthcare facilities) typically have maintenance capex at 40-60% of depreciation. Asset-light businesses (software, professional services) might be 20-30%. If someone tells you their capex is 10% of depreciation and they operate a fleet of trucks, something is wrong.

In an interview, say: "I would want to understand the maintenance versus growth capex split. Management typically under-reports maintenance capex. I would cross-check against depreciation, look at the age of the asset base, and benchmark against comparable businesses to form my own view."

Working Capital: Where Cash Quietly Disappears

Working capital is the topic that separates good analysts from great ones. It is also where interviewers frequently probe because the dynamics are non-obvious.

Net working capital = Accounts Receivable + Inventory — Accounts Payable (simplified).

When a business grows, it typically needs more working capital. It carries more inventory, extends more credit to customers, and may not get proportionally better terms from suppliers. This "working capital absorption" is a use of cash that EBITDA does not capture.

Conversely, when a business shrinks, working capital releases — the company collects receivables, draws down inventory, and generates a one-time cash inflow. This can temporarily make cash flow look better than the operating reality.

Why the lender cares more than the equity investor: the equity investor models working capital as a percentage of revenue and moves on. The lender asks a different question — what happens to working capital in a downside case, and does it help or hurt cash flow?

Key dynamics to flag in an interview:

• Seasonal businesses can have massive intra-year working capital swings. A retailer building inventory for Q4 might need $20M of working capital in Q3 that releases in Q1. If the debt service payment falls during the build period, liquidity can be strained even if the annual numbers look fine.
• Customer concentration creates receivables risk. If one customer representing 25% of revenue slows payment from 30 days to 90 days, the cash impact is immediate and large.
• Stretched payables are a hidden borrowing mechanism. If the company is paying suppliers in 90 days instead of 30, it is effectively using trade credit as free financing. If suppliers tighten terms — or the company needs to pay faster to retain a critical vendor — the cash outflow is sudden.

For more depth on working capital dynamics in interviews, see How to Talk About Working Capital in a Private Credit Interview.

EBITDA Addbacks: When the Starting Number Is Wrong

In private credit, the EBITDA you are given in an information memorandum is almost always "adjusted EBITDA" — the sponsor's version, which includes addbacks for items they consider non-recurring or below normal run-rate.

Common addbacks include:

• Restructuring and integration costs — legitimate if truly one-time, but some businesses have "one-time" restructuring charges every year.
• Pro forma synergies — cost savings from an acquisition that have not been realized yet. The sponsor's adjusted EBITDA might include $5M of "expected synergies" from a recent acquisition. The lender should ask: have they been implemented? How confident are we?
• Run-rate revenue adjustments — annualizing a partial-year contract or a recent price increase. This inflates EBITDA with revenue that has not yet been fully earned.
• Stock-based compensation — added back because it is non-cash, but it is a real cost of attracting talent. If you add it back, you need to fund the equivalent in cash comp eventually.
• Management fees, sponsor fees, and related-party transactions — these often flow out of the business and represent real economic leakage.

The lender's job is to form an independent view of "lender-adjusted EBITDA." This means taking the sponsor's number, challenging the addbacks, and arriving at a more conservative figure.

In an interview, the strong answer is: "I would not take the sponsor's adjusted EBITDA at face value. I would review each addback individually, assess whether it is truly non-recurring, check the track record — has this company had 'one-time' items every year? — and form my own view of sustainable EBITDA. The leverage multiple is only as meaningful as the EBITDA denominator is reliable."

Cash Interest Coverage: The Ratio That Matters Most

For a private credit lender, the single most important ratio is cash interest coverage: how many times can the borrower pay its interest expense out of its operating cash flow?

The calculation: EBITDA (lender-adjusted) — Maintenance Capex — Cash Taxes / Cash Interest Expense

A coverage ratio of 2.0x means the business generates twice what it needs to service its debt. A ratio of 1.5x is thinner. Below 1.3x, the business is running with very little margin for error.

Why coverage matters more than leverage in a downside: leverage tells you the quantum of debt relative to earnings. Coverage tells you whether the cash flow can actually support the payments. A business at 4x leverage with poor cash conversion might have worse coverage than a business at 5x leverage that converts efficiently.

When an interviewer asks about debt capacity, start with coverage, not leverage. Say: "Leverage is one input, but I would size the debt based on what the business can comfortably service. I would want to see minimum 2.0x cash interest coverage in the base case, and I would stress-test it to make sure coverage stays above 1.0x in a realistic downside."

The 60-Second Interview Answer

If asked "How do you analyze cash flow in a private credit context?", here is your framework:

"I start with EBITDA but treat it as a starting point, not an answer. The first thing I do is assess the addbacks — are they truly non-recurring, or is the sponsor inflating the number with pro forma synergies or repeated one-time charges? Once I have a view on sustainable EBITDA, I bridge to free cash flow by deducting maintenance capex, cash taxes, and working capital absorption. That gives me the cash actually available to service debt.

The key ratio is cash interest coverage — I want to see at least 2x in the base case and test what happens in a downside. If EBITDA drops 20% and working capital absorbs cash during a contraction, does coverage hold above 1x? If not, the debt is too large regardless of what the leverage multiple says."

What Weak Answers Sound Like

• "EBITDA is $50M and leverage is 5x, so the debt is $250M." — No cash flow analysis. No conversion. This is how investment bankers size debt, not lenders.
• "I would look at the cash flow statement." — Too vague. Which parts? What are you looking for?
• "Free cash flow is EBITDA minus capex." — Incomplete. Misses working capital, misses the maintenance vs growth split, misses taxes. Shows a surface-level understanding.

How This Connects to the Broader Framework

Cash flow analysis is the foundation of everything else in credit:

• Debt sizing depends on how much cash the business can generate to service the debt. See How to Size Debt in a Private Credit Interview.
• Covenant analysis depends on understanding whether the borrower will stay within its financial tests. See How to Discuss Covenants in a Private Credit Interview.
• Downside analysis requires stressing the cash flow bridge to see where it breaks. See How to Analyze Downside Risk in a Private Credit Case Study.
• The "would you lend?" answer hinges on whether cash flow supports the debt through the cycle. See How to Answer "Would You Lend to This Business?".

If you can walk through the EBITDA-to-FCF bridge clearly and confidently in an interview, you are demonstrating the core analytical skill that private credit firms hire for.

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The Free Credit Investment Memo Framework includes a full cash flow analysis section showing exactly how lenders bridge from EBITDA to free cash flow. Download it to practice building your own analysis. For 80 interview questions with model answers including cash flow deep-dives, see the Private Credit Interview Guide.