How Much Debt Should a Business Have? 6 Ratios Lenders Use to Decide

No statute, regulator, or lender publishes a figure that tells an owner how much debt a small business ought to carry, and the silence is not an oversight. What lenders publish instead are ratios, each one a way of dividing the debt by something the business owns or earns, and each one answering a slightly different worry on the lender's side of the desk.

The six below are the ones an owner is likely to meet in an underwriting memo or a decline letter. Every figure in the examples is hypothetical. The examples exist to show the arithmetic, and none of them certifies any real business as sound.

1. Debt Service Coverage Is the Ratio a Federal Agency Wrote Down

The Small Business Administration's lending rulebook, SOP 50 10 8, the SBA's standard operating procedure for its loan programs, defines operating cash flow as earnings before interest, taxes, depreciation, and amortization. It defines debt service as "the future required principal and interest payments on all business debt inclusive of new SBA loan proceeds." Then it states the standard for a standard 7(a) loan: the applicant's coverage ratio "must be equal to or greater than 1.15 on a historical and/or projected cash flow basis and 1:1 on a global basis."

The arithmetic is division, and the division is unforgiving. Take a hypothetical machine shop with $230,000 of annual operating cash flow and $200,000 of required principal and interest across every loan it carries. Its coverage is 1.15, which sits on the line exactly. Add a $30,000 annual equipment payment and the ratio falls to 1.0, a figure that means every dollar the shop earns before interest and taxes has already been promised to someone.

Owners tend to read 1.15 as a pass mark, and the SOP does not use it that way. It is a floor beneath which the loan does not proceed, one element of an analysis that also reaches three years of historical financial statements, an interim statement, a debt schedule the applicant prepares (including, the SOP says, "any shareholder debt"), and tax transcripts the lender must reconcile against the numbers the owner supplied. A shop at 1.16 has cleared one gate of several.

A revision, SOP 50 10 8.1, takes effect on October 1, 2026. It keeps the 1.15 standard for standard 7(a) loans and states a 1.10 figure for 7(a) Small Loans other than changes of ownership. The distance between those two numbers is small. For a business sitting between them, it is the entire question.

But none of this binds a conventional bank or an online lender, each of which sets its own threshold in its own credit policy. The SBA figure has one virtue the others lack, which is that it was written down by a federal agency and can be read by anyone, and that alone makes it the most useful benchmark an owner can hold up against a lender's refusal.

2. Debt to EBITDA Counts Years

Divide total debt by annual EBITDA and the result reads as a rough count of years: how long the business would need to retire everything it owes if every dollar of operating cash flow went to creditors and nothing went to taxes, equipment, or the owner. A hypothetical distributor with $600,000 of debt and $200,000 of EBITDA sits at three. The same distributor after a poor year, with EBITDA of $120,000, sits at five, though it has not borrowed a dollar more.

The ratio moves when earnings move, and earnings move first. Lenders set their ceilings for it in internal credit policy, which an applicant rarely sees.

3. Debt to Equity Shows Whose Money Is at Stake

Total liabilities divided by owners' equity describes how much of the enterprise other people financed. A company reporting $400,000 of liabilities against $100,000 of equity stands at four to one; its creditors have four dollars in the business for each dollar the owners left there.

The ratio says nothing about whether the company can pay. It describes who absorbs the loss if it cannot, and when equity turns negative the figure stops behaving like a ratio at all.

4. The Current Ratio Looks Only at the Coming Year

Current assets divided by current liabilities: cash, receivables, and inventory set against what falls due within twelve months. A hypothetical café holding $45,000 of current assets against $60,000 of current liabilities sits at 0.75. It may be profitable. It still cannot pay what arrives in the next year from what it holds today, and the ratio says so in one figure.

Merchant cash advances complicate the calculation, because many are written as purchases of future receivables rather than as loans, and whether a particular contract is in substance a loan turns on its own terms. An accountant will classify the balance one way or the other. The lender reading the statement will ask which way, and why.

5. For Advance Users, the Daily Debit Share Decides the Rest

A merchant cash advance shows itself most plainly on the bank statement, where the debits appear every business day in the same amount. The measure is plain: fixed remittances taken in a month divided by deposits received in that month. It has no official name and no regulatory threshold, and it is the most honest of the six, since a bank statement cannot be adjusted for depreciation.

Consider a hypothetical retailer depositing $80,000 a month, with two advances debiting $450 and $350 on each of 21 business days. The debits come to $16,800 a month, or 21 cents of every deposit dollar. A third advance at $500 a day raises the monthly total to $27,300, or roughly 34 cents of each dollar, and that is before rent, payroll, inventory, or sales tax has taken its share.

A ratio is a sentence with the verb removed. The lender supplies the verb.

Now return the same retailer to the SBA's arithmetic from the first section. Suppose its annual operating cash flow is $150,000. Twelve months of those debits total $327,600, so its coverage on the advances alone falls below one half. No SBA lender can refinance that position on those numbers, and the owner who applies anyway usually learns this from a decline letter rather than from the division, which could have been done at the kitchen table in about four minutes, with a calculator and last month's statement, before anyone else was asked to read it.

Stacking is the mechanism that drives the share upward. Each new advance is underwritten against deposits that earlier advances already claim, and each funder sees the others only in the statement lines. A contract's reconciliation terms, where it has them, were written for the month when deposits fall. Whether they are honored in that month is a separate matter.

6. When Liabilities Pass Assets, the Code Has a Word for It

Section 101(32) of the Bankruptcy Code's definitions section calls an entity insolvent when "the sum of such entity's debts is greater than all of such entity's property, at a fair valuation." It is the only ratio here that the law itself writes, and it is phrased as a comparison rather than a number: debts over assets, greater than one.

Crossing that line triggers nothing on its own. A business may trade while insolvent for months, and the Code does not require insolvency before a chapter 7 or chapter 11 petition. What changes is how the business's later payments look in hindsight, since the preference and fraudulent transfer provisions ask, among other things, whether the debtor was insolvent when it paid.

Where the Numbers Point Toward Negotiation

Delancey Street works on the fifth ratio's numerator, as a negotiator and not a law firm, giving no legal advice. It negotiates what a business owes its advance funders and other creditors outside court, opens each matter by reading the contracts and bank activity at no charge and in confidence, and brings in independently licensed counsel when a question turns legal. A business whose coverage fails before any advance is counted has an operating problem that no negotiation corrects, and one whose debts already exceed its assets at a fair valuation may belong with bankruptcy counsel first; the review is where that sorting begins.

Ratios describe a business as a creditor sees it on one afternoon, from one set of statements. The owner lives with every other afternoon, which is why the kitchen table arithmetic is worth doing before the application rather than after it.