What it means
Lenders provide money to a business and expect to be paid interest and have their principal returned. Cash flow to creditors measures the net flow back to them.
It adds interest paid and subtracts net new borrowing during the period. If a company pays $80,000 of interest and borrows an extra $100,000, the lenders are net contributors.
Cash flows to the company, so the result is negative $20,000. If the company pays $80,000 of interest and repays $50,000 of debt, the figure is $130,000, because lenders are being paid.
The measure comes from corporate finance theory, where the cash generated by a firm's assets must go to creditors and shareholders or be retained. It is part of the identity: cash flow from assets equals cash flow to creditors plus cash flow to stockholders.
Analysts use it to check that the numbers in the statements fit together. For managers, it shows whether the company is a net payer to lenders or relying on them for funding.
A rapidly growing business often has negative cash flow to creditors because it keeps borrowing. A mature one often has a positive figure as it pays down debt.
There are some practical points. Net new borrowing is the change in long-term debt on the balance sheet, so the calculation depends on the balance sheet classification.
Short-term borrowing may be included or left out, and the analysis should state which version it uses. The measure is also helpful in reviewing a company's funding choices.
A business that keeps showing a large negative figure is relying heavily on new debt, and its lenders will watch whether the borrowing is producing returns. Management teams therefore explain new borrowing alongside the plan to service it.
In practice
Real-world examples
Example 1
A logistics company pays $150,000 of interest and repays $250,000 of loans, with no new borrowing. Net new borrowing is negative $250,000. Cash flow to creditors is $150,000 + $250,000 = $400,000. The company is paying down debt, which is typical for a business shrinking its operations or running out of growth projects.
Example 2
A start-up pays $20,000 of interest and draws down a $500,000 loan during the year. Cash flow to creditors is $20,000 - $500,000 = negative $480,000. Lenders are funding its growth. The founders know that the figure will turn positive once the borrowing stops and repayments begin.
Example 3
A stable utility pays $600,000 of interest and refinances, so its debt is unchanged. Cash flow to creditors equals the interest paid, $600,000. The analyst notes that the result shows a steady pay-out to lenders.
Think of it
Imagine paying off your mortgage and car loan each month. The money you hand over to the bank from your salary is your personal cash flow to creditors.
Formula
Calculation
Cash flow to creditors = Interest paid - Net new borrowing
Net new borrowing = Ending long-term debt - Beginning long-term debt
Worked example: a company paid $80,000 of interest. Its long-term debt was $1,000,000 at the start of the year and $1,100,000 at the end.
Step 1: Net new borrowing = $1,100,000 - $1,000,000 = $100,000.
Step 2: Cash flow to creditors = $80,000 - $100,000 = -$20,000.
The negative result means that lenders put in $20,000 more than they received, which is typical of a company still expanding with borrowed money.Case study
Seen in the real world
Maplewood Hospitality is an illustrative, fictional hotel group. In one year, it paid $300,000 of interest. Its long-term debt rose from $4,000,000 to $4,600,000 as it financed a new hotel.
Cash flow to creditors was therefore $300,000 - $600,000 = -$300,000. The chief financial officer used the figure in a board paper to show that lenders had provided $300,000 more than they had received. She also checked that cash flow to shareholders and the other figures balanced with total cash flow from assets.
The illustrative lesson is that the sign tells you who is funding whom. A negative figure is fine during expansion but needs a plan for when borrowing slows. The board agreed to review the figure each year, and to set a target for when cash flow to creditors should turn positive as the new hotel matures.
Watch out
Common mistakes
- Forgetting to subtract net new borrowing, and treating interest paid as the whole answer.
- Reading a negative result as a loss, when it simply means lenders supplied net cash.
- Mixing the signs when debt falls, so that repayments are added incorrectly.
Questions
People also ask
Is cash flow to creditors the same as interest expense?
No, interest expense is an income statement figure, while cash flow to creditors considers interest actually paid and net new borrowing.
How does it relate to cash flow to stockholders?
Together they equal cash flow from assets, so total cash is split between lenders and shareholders.
Can it be negative?
Yes, when new borrowing exceeds interest paid, which is common in growing companies. Lenders accept this as long as the borrowing is used for projects that will later generate cash.