How to measure your SME's debt capacity
Posted: Sun Dec 15, 2024 6:04 am
Monthly income, fixed expenses, financial and tax costs, cash flow level… Debt capacity depends on multiple factors.
In the absence of a personalized analysis, a debt level of 30% of your income-generating capacity is accepted as adequate.
What is the borrowing capacity of an SME ? What are its limits and how far can it go before being considered insolvent? To answer these questions, we must first define the term debt.
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What is debt?
Indebtedness occurs when debt is generated. With it, we acquire a commitment to pay at a given time.
In an SME, debt could arise, for example , when applying for a loan . The bank grants us a sum of money, which we must repay within a certain period of time. This is how we acquire a commitment to pay (debt).
We will measure the level or capacity of indebtedness based on our solvency. An SME is solvent when it has the economic capacity to meet the immediate and unavoidable payment obligations that it has acquired.
So, what is the debt capacity of my SME?
Various reports and analysts indicate that an appropriate level of debt is 30% of income. That is, if the monthly and recurring income of my SME is €100,000/month, my maximum debt capacity would be €30,000/month.
If, in order to generate those €100,000/month, I need to face payment obligations of more than €30,000 in the same period, we would be at the limit of our borrowing capacity. This amount includes obligations that go beyond bank loans. It includes any short-term payment obligation , such as payroll, payments to suppliers, purchases necessary to maintain the level of productivity, etc.
In the absence of a personalized analysis, a debt level of 30% of your income-generating capacity is accepted as adequate.
What is the borrowing capacity of an SME ? What are its limits and how far can it go before being considered insolvent? To answer these questions, we must first define the term debt.
Download the FREE guide “Learn to insurance email list manage your cash flow like an expert”
What is debt?
Indebtedness occurs when debt is generated. With it, we acquire a commitment to pay at a given time.
In an SME, debt could arise, for example , when applying for a loan . The bank grants us a sum of money, which we must repay within a certain period of time. This is how we acquire a commitment to pay (debt).
We will measure the level or capacity of indebtedness based on our solvency. An SME is solvent when it has the economic capacity to meet the immediate and unavoidable payment obligations that it has acquired.
So, what is the debt capacity of my SME?
Various reports and analysts indicate that an appropriate level of debt is 30% of income. That is, if the monthly and recurring income of my SME is €100,000/month, my maximum debt capacity would be €30,000/month.
If, in order to generate those €100,000/month, I need to face payment obligations of more than €30,000 in the same period, we would be at the limit of our borrowing capacity. This amount includes obligations that go beyond bank loans. It includes any short-term payment obligation , such as payroll, payments to suppliers, purchases necessary to maintain the level of productivity, etc.