If your company is investor-backed, works with a bank, or uses financial targets for internal management, taking on business debt changes several ratios that stakeholders watch. Understanding these helps you plan borrowing decisions with confidence.
The below is a plain-English explanation. Speak to your accountant before drawing conclusions about your specific company position.
Debt-to-equity ratio
This compares your total liabilities to shareholder equity. Taking on new debt increases the numerator, raising the ratio. Investors and some bank covenants have thresholds for this ratio — check your shareholder agreement or banking facilities before adding significant new debt.
Gearing
Similar to debt-to-equity, gearing expresses how much of the business is funded by debt vs equity. Higher gearing means higher financial risk (more interest obligations) but can also mean higher return on equity if the debt is deployed productively. For most SMEs, the relevant question is simply: can we comfortably service the repayments from trading cashflow?
Current ratio (liquidity)
Your current ratio is current assets divided by current liabilities. A short-term loan appears as a current liability (or partly current if the loan term crosses the year-end). This reduces your current ratio in the short term. If you have bank lending covenants requiring a minimum current ratio, be aware of this effect.
Interest cover
Interest cover measures how many times your operating profit covers your interest payments. Adding a new loan increases interest costs, reducing this ratio. Lenders and investors often look for interest cover of at least 2–3x. Calculate your post-loan interest cover before committing to ensure you remain within any relevant thresholds.
Net debt
Net debt = total debt minus cash and cash equivalents. A new loan increases net debt. Some businesses track a net debt to EBITDA target; taking on new borrowing moves this ratio upward. For most SME business loans, the change is modest relative to total assets.
Practical implications
- If you report to investors or have a shareholder agreement with financial covenants, check these before drawing on a new facility.
- If you have a bank overdraft or invoice finance facility with its own covenant tests, understand how new debt interacts.
- For most small businesses without external financial covenants, the practical question is simpler: can monthly repayments be made from trading cashflow? Start there.
See also: Keeping business borrowing proportionate to revenue, How to budget business loan repayments into cash flow, Forecasting the cost of borrowing over the term.