How much can my business borrow? A debt-capacity guide

One of the most common questions a business owner asks before raising finance is also the hardest to answer alone: how much can we actually borrow? The instinct is to start with how much you want. Lenders start somewhere else entirely — with how much your business can comfortably repay, what stands behind the loan if it can't, and how risky your sector looks from a credit committee's seat.

The three questions every lender asks

Strip away the paperwork and almost every credit decision comes down to three questions: Can the business service the debt? (cash flow), What secures it if cash flow fails? (security), and How risky is the context? (sector, track record and management). Get comfortable with these and you can estimate your own capacity surprisingly well.

1. Can you service it? — debt-service cover

The single most important measure is the debt-service coverage ratio (DSCR): the cash available to service debt divided by the total debt service (interest plus scheduled principal) in a period. A DSCR of 1.0x means you generate exactly enough to meet repayments and nothing more — uncomfortably tight. Most lenders look for headroom, commonly a minimum of around 1.25x to 1.50x, depending on sector and how stable the cash flows are.

A simplified illustration: if your business generates roughly USD 1.0m of cash available for debt service each year and a lender requires a 1.4x cover, the annual debt service it will support is about USD 1.0m ÷ 1.4 ≈ USD 714k. Over a five-year amortising facility, that points to materially less than USD 3.5m of debt once interest is taken into account — a very different figure from a simple "five times USD 714k."

2. What secures it? — security and guarantees

Cash flow tells the lender whether you can repay; security tells them what happens if you can't. Property, plant, receivables and inventory can all serve as collateral, each lent against at a different advance rate (loan-to-value). Strong, liquid security can expand what you borrow; its absence often means a lender asks for a personal guarantee — a point worth negotiating carefully, because it moves risk onto you personally.

3. How risky is the context? — leverage and sector

Lenders also size debt as a multiple of earnings, typically net debt to EBITDA. Stable, cash-generative businesses can often support around 2.0x–3.5x; cyclical or asset-light businesses tend to be held lower. Your sector, customer concentration, the quality and repeatability of your earnings, and the strength of your management team all move the dial.

A rough way to estimate your own capacity

For a back-of-envelope read: take a normalised EBITDA figure, apply a conservative leverage multiple appropriate to your sector, and then sanity-check the result against DSCR — can the resulting repayments be covered comfortably from cash flow, with room to spare for a bad year? If the two approaches disagree, the lower number is usually the realistic one. The purpose of the borrowing matters too: an asset purchase that generates its own cash supports more debt than funding a loss.

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