Why depreciation and amortization can be used to repay loans?

To put it simply: profit+depreciation+amortization is equivalent to the current cash balance.

When examining the repayment ability, creditors should first look at whether there is a cash balance in each period, that is, the net cash flow in each period.

Depreciation and amortization are one-time cash outflows when capital is initially recorded, and then profits are adjusted in stages (recovered in stages in profits), but cash flow is not involved! In other words, it affects profits, but does not affect net cash flow, so it can be regarded as a source of debt repayment.

Extended data

In the case of the same loan term, amount and interest rate, at the initial stage of repayment, the monthly repayment amount of average capital repayment method is greater than the equal principal and interest. However, according to the whole repayment period, average capital's repayment method will save the expenditure of loan interest.

Generally speaking, the repayment method of equal principal is suitable for borrowers who have a certain economic foundation, can bear heavy repayment pressure in the early stage and have an early repayment plan. Matching principal and interest repayment method is convenient to arrange income and expenditure because the monthly repayment amount is the same, and it is suitable for borrowers whose income is relatively stable because economic conditions do not allow early repayment and excessive investment.

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