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Business debt is any money the business owes that has to be repaid, from a bank loan to an unpaid supplier invoice. There is no healthy amount in pounds or dollars, because the number that matters is a ratio: what the repayments cost you each month against what the business actually earns each month. Lenders look at roughly the same thing. The five steps below decide whether to take debt on, the schedule further down lists what you already owe in the format a lender will ask for, and the three ratios tell you whether the answer is comfortable or not. If you are already behind on payments, skip to the last section.
Search this and you get two completely different answers. Regional banks explain that debt is a tool for growth, which it is when you are choosing it. Debt advice charities explain how to get out of it, which is what you need when you are not. Both are right. They are answering different people.
The useful version sits between them, and it is a single question: does this debt cost less than what it buys you, and can the business still pay it in a bad month. Everything below is a way of answering that with numbers rather than nerve.
How to Decide Whether to Take On Business Debt
Work through these before you sign anything. None of them requires an accountant, and most of the answers are already in your bank account.
- Name what the money buys, and when it pays back. Debt that funds an asset producing revenue is a different proposition from debt that covers a shortfall. Borrowing to buy equipment that earns has a repayment date you can predict. Borrowing to cover a gap has one you are guessing at. Write down what the money does and when it returns.
- Work out the real monthly cost, not the rate. The number that bites is the monthly repayment, not the headline percentage. Add arrangement fees, insurance the lender requires, and any early repayment charge. Compare that total against the monthly income the borrowing is supposed to create.
- Check it survives a bad month. Take your worst month in the last year, not your average, and see whether the repayment still clears. A business of one has no other revenue line to absorb a quiet quarter, which is the difference between your position and the case studies the lender shows you.
- Read what you are pledging. Whether the debt is secured, against what, and whether you are signing a personal guarantee. This is the part that turns a business problem into a personal one, and your business structure does not protect you from a guarantee you signed.
- Write it into the schedule before you sign, not after. Add the proposed debt to the schedule below alongside what you already owe, and recalculate the ratios with it included. A loan that looks affordable alone often is not once it sits next to the others.
If the borrowing still makes sense after those five, it probably does. If you found yourself estimating rather than reading, that is the answer.
Aziz's take: Step three is the one that matters and the one nobody does. Lenders assess you on your good months because that is what the accounts show, and it is very easy to borrow against a run of strong invoices that quietly assumes the run continues. I would rather see someone borrow less against their worst month than the maximum against their best. The first is a decision. The second is a bet you have not noticed you are making.
The Business Debt Schedule
This is the artefact, and it is the document a lender or an accountant will ask for by name. Every debt on one page with its balance, rate, monthly cost and maturity, plus the totals that feed the ratios below. Fill in the highlighted values and write NONE where something does not apply rather than deleting the row.
How to use this
Fill in
- One block per debt. Include everything: loans, cards, overdrafts, finance agreements, tax owed and supplier invoices past their terms.
- The monthly payment matters more than the balance. It is what the business has to find every month regardless of how trading goes.
- Section 04 last. It totals the others and feeds the three ratios below.
Check before you file it
- Unpaid tax and overdue supplier invoices are listed. They are debt even when nobody called them that.
- Every personal guarantee is recorded, with who signed it.
- The review date in 04 is in your calendar, not only in this document.
What goes wrong
- Listing only the formal loans, which understates the monthly obligation and makes the ratios look healthier than they are.
- Recording the rate but not the monthly payment, which is the figure that actually has to clear.
- Building it once before a loan application and never opening it again.
The Three Ratios That Say Whether It Is Healthy
Once the schedule is filled in, three calculations turn it into an answer. All three use figures from section 04.
Debt service coverage. Divide your monthly income after costs by your total monthly debt payments. This is the ratio lenders lean on hardest, because it answers whether the business can pay. A result above 1 means the income covers the payments. Comfortably above 1 means it still covers them in a poor month. At or below 1 means the debt is being paid from somewhere other than trading, which is usually savings or more debt.
A worked example. A one person consultancy bills 8,000 a month and has 2,400 left after its own costs and the owner's pay. Its loan and card payments come to 900 a month. Coverage is 2,400 divided by 900, which is 2.67. There is room. If it borrowed again and the payments rose to 2,000 a month, coverage becomes 2,400 divided by 2,000, which is 1.2. That is technically still covered, and it is one slow month away from not being.
Debt to income. Divide total monthly debt payments by monthly revenue before costs. This is the blunter version and it is useful because it is hard to argue with. In the example above, 900 against 8,000 is a little over 11 percent of everything the business earns going straight back out before anything else is paid.
The bad month test. Repeat the coverage calculation using your worst month in the last twelve rather than a typical one. This is not a standard ratio and no lender will ask for it. It is the one that matters most at your size, because a business of one has no second revenue stream to cover a gap. Cash flow is where this shows up first, and the profit and loss statement is where it becomes undeniable.
What Counts as Business Debt
More than people list. A debt schedule that only includes the bank loan understates the monthly obligation, which makes every ratio above look healthier than it is.
Formal borrowing is the obvious half: term loans, business credit cards, overdrafts, equipment finance, invoice finance and merchant cash advances. The half people leave off is trade credit that has gone past its terms, tax owed but not yet paid, and anything financed through a buy now pay later arrangement. Money you owe on a date that has passed is debt whatever the paperwork calls it.
Two distinctions change how you treat them. Secured against unsecured: secured debt is tied to an asset the lender can take, which makes it cheaper and more dangerous. Personal guarantee or not: a guarantee means the debt follows you personally if the business cannot pay, regardless of structure. That is the single most important line in any agreement you sign, and it is the point where the protection your structure gives you stops applying.
Recording all of it is part of the financial controls that keep money leaving the business on purpose rather than by surprise.
If You Are Already Behind
This section is for a different situation from the rest of the article, and the advice inverts.
Talk to creditors before you miss the payment, not after. A supplier or lender contacted in advance is negotiating. The same one contacted after a missed payment is collecting. Most will arrange something, because a slower repayment is worth more to them than a formal recovery process.
Know which debts are not like the others. Tax owed and anything secured or personally guaranteed carry consequences the rest do not, and they are the ones to protect first even when another creditor is louder. Paying the most aggressive caller rather than the most dangerous debt is the common and expensive mistake.
Fill in the schedule anyway. It is harder to look at when the numbers are bad, and it is the thing that makes the situation decidable rather than frightening. You cannot prioritise debts you have not listed.
Get proper advice, and do not pay for it first. Free debt advice services exist in most countries and are staffed by people who negotiate with these creditors daily. They will do more for you in an hour than any article. Be careful with companies that charge upfront for consolidation or relief, particularly if they contacted you. This guide is not a substitute for advice regulated in your own country.