The second driver of interest paid by a client is usage of an overdraft facility. Although you might provide an overdraft facility at a certain level for the client, the real question is, how much of the facility has been used during the period covered by the income statement?
If usage has been low, the amount of interest paid will have been low – nothing to do with the actual overdraft limit. Now, if things turn difficult for the client, overdraft usage might increase and the amount of interest paid will increase which will have a negative effect on the interest cover ratio
How to get around this? When you’re thinking about the interest cover ratio in the future, you could do this; re-calculate it using the existing EBIT figure but adjust the interest paid figure by working a new interest amount based on an interest rate maybe 1% higher than it is now and based on the total overdraft facility, not the usage. If the new interest cover ratio still looks good, then you should be okay at least for the next year, assuming that profit doesn’t fall.
Look at it as providing yourself with a margin of safety in case interest expenses increase in the future.