business debt

[djbobbins]

There are a couple of different things to consider:

 

gearing (debt to equity ratio in the funding of your business)

cover ratio (number of times that your business profits will pay the interest on your outstanding debts)

 

Since your business is likely to be "owner operator" personally I (and your bank) would probably be most concerned about the latter. As well as interest charges, however, I'd recommend taking into account any fixed or obligatory payments such as vehicle leases, property rates and also salaries.

 

The total cash outflows for all of these mandatory payments represent the level of risk to your business of failing. It is worthwhile remembering that most businesses do not fail as an immediate result of making a loss, but of not having the cash to pay debts or interest costs as they become due. Sure, if in the long term a business makes recurring significant losses, it is unlikely to be generating positive cash and thus is likely to fail, but that is a symptom of long term problems.

 

So - in a kind of answer which only opens up a load more questions - perhaps consider how much you turned over last year (or more importantly, got paid in cash), what your fixed costs and interest charges were, and therefore what the ratio was. How much does your turnover need to fall before you aren't able to cover costs?

 

If your business can take a reduction in turnover by 50% and you've got long term work contracts, then you're probably okay.

 

However if you find out that should your turnover reduce by 10%, you will be struggling to pay your bills, you might want to consider reducing your cost base!

[Linesman1]

I deal with @ £35M 0f contracts/year - I suggest for piece of mind you keep gearing to less than 20%