Inventory every obligation
List principal, interest, fees, maturity, collateral, guarantees, covenants, required reserves, and payment dates for every loan, card, lease, and informal obligation. Reconcile the list to the books and lender statements.
Separate debt that funds a productive, timed investment from debt that repeatedly covers operating losses. They create different questions and different urgency.
Stress the cash, not just the income
Run the payment schedule through a slower sales period, delayed receivables, margin pressure, a major customer loss, and a necessary repair. Include taxes, payroll, inventory purchases, and owner distributions in the same view.
Debt-service coverage and leverage can be useful lenses, but their interpretation depends on definitions and industry. Do not label a ratio safe or unsafe without understanding the lender’s calculation and the business context.
Read the agreement before deciding
Check reporting duties, restrictions, default triggers, personal guarantees, prepayment terms, and whether new borrowing is permitted. A lender, attorney, CPA, controller, or CFO may each have a different part of this review.
If a payment problem is foreseeable, communicate early and document options. Waiting until a missed payment removes choices and can create legal or tax consequences.
Apply the guide to the next decision
Start with a complete list of debt obligations: lender, balance date, scheduled payment, maturity information, and any variable terms the owner can verify. Tie amounts to current statements and agreements rather than relying on a remembered payment. Include operating commitments that compete for cash. A summary is an organizing tool, not an assessment of what a lender will approve.
Use a forecast to test timing and assumptions, then review the result with the lender and qualified professionals. Compare the expected payment schedule with realistic receipts and existing commitments, and note which figures are uncertain. Financing decisions involve terms and business facts that a general guide cannot evaluate. Do not infer approval, capacity, or a suitable borrowing amount from a single ratio or scenario.
Related questions owners ask
These related questions add practical context to the guide. Use the answers as a starting point, then check them against the records, timing, and operating details of your own business.
Should I use a line of credit?
A line of credit can bridge a timing gap, but it should not conceal persistently unprofitable work or uncontrolled spending. Compare its purpose, availability, interest, fees, repayment terms, collateral, covenants, and forecasted repayment capacity with a lender and qualified financial professional.
Open the question in the Business Owner LibraryHow much debt can my business safely handle?
Safe debt depends on predictable cash generation, existing obligations, seasonality, collateral, customer concentration, and how the business performs under a downturn. Build a debt-service schedule, compare it with conservative cash flow, and review lender terms rather than adopting a universal debt ratio.
Open the question in the Business Owner LibraryWhich locations are actually profitable?
Compare each location’s revenue and directly attributable costs, then make shared overhead allocations explicit rather than hiding them in one central bucket. Also consider location-level cash needs, capacity, customer mix, and whether a location is still being built out before judging its contribution.
Open the question in the Business Owner LibraryHow much debt is too much?
Debt becomes too much when required payments leave too little room for normal volatility, investment, and essential operations. Review debt service against realistic cash generation, maturity and rate risk, collateral, covenants, customer concentration, and downside scenarios rather than relying on one universal ratio.
Open the question in the Business Owner LibraryShould I pay down debt or keep cash?
Compare the certainty of scheduled payments with the value of liquidity for payroll, seasonal needs, opportunities, and downside protection. Review interest cost, prepayment terms, covenant requirements, upcoming obligations, and your cash forecast before choosing; preserving cash can be rational even when paying debt would reduce interest.
Open the question in the Business Owner LibraryHow much working capital will our growth require?
There is no fixed working-capital amount for a $10 million company. Estimate the cash tied up by the incremental sales cycle: expected receivables and inventory, less supplier financing, plus payroll and other timing gaps; test the estimate against payment terms, seasonality, margins, and the pace of growth.
Open the question in the Business Owner LibraryWhat happens to cash if revenue drops 10%?
The result depends on which revenue disappears, how quickly costs can change, customer payment timing, margins, inventory, debt, and fixed commitments. Rebuild the cash forecast with the drop applied to realistic customers or products, then model delayed collections and management actions so you can see both the exposure and the available response.
Open the question in the Business Owner LibraryHow much financial cushion should a $20 million company maintain?
A company should size its cushion from the volatility and timing of its business, not a revenue-based rule. Consider fixed outflows, payroll, debt service, seasonality, customer concentration, supplier terms, inventory, access to committed credit, and the time needed to respond to a downturn; model a few plausible disruptions to choose a defensible range.
Open the question in the Business Owner LibraryWhat numbers would warn me that we're heading toward trouble?
Watch trends and relationships: shrinking cash, slower collections, falling margins, rising debt service, missed forecasts, unusual adjustments, customer concentration, and repeated control exceptions. No single metric proves trouble, so define thresholds for investigation, review the operating cause behind each movement, and act before a liquidity event forces the decision.
Open the question in the Business Owner Library