How much debt is too much for a business our size?

There's no single universal answer to how much debt is too much because it depends on your industry, business model, asset base, cashflow strength, and growth stage, but there are several key metrics and warning signs that indicate dangerous debt levels. A common rule of thumb is the debt-to-equity ratio: if total debts exceed total equity by more than 2:1 or 3:1, you're highly leveraged and vulnerable to shocks. The debt service coverage ratio is crucial: can your operating profits comfortably cover debt repayments plus interest? If this ratio falls below 1.2 to 1.5, meaning you're barely covering debt payments or dipping below, you're in dangerous territory. Interest coverage ratio matters too: if your earnings before interest and tax (EBIT) divided by interest payments falls below 2.5 to 3, you're paying too much of your profits in interest. Current ratio (current assets divided by current liabilities) should ideally be above 1.5—if it's below 1, you don't have enough liquid assets to cover short-term debts and you're likely to face cashflow crises. Beyond ratios, practical warning signs include: borrowing just to cover operating expenses rather than for growth investment; constantly using maximum overdraft facilities with no ability to reduce them; taking on new debt to repay existing debt (robbing Peter to pay Paul); creditors demanding immediate payment or threatening legal action; inability to take advantage of supplier early payment discounts because you can't afford to pay; and management spending more time managing debt than running the business. Industry context matters enormously: asset-heavy businesses like manufacturing or property development can often sustain higher debt-to-equity ratios because they have tangible security, whereas service businesses with few assets should maintain much lower debt levels. High-growth businesses might carry significant debt temporarily if they're scaling rapidly with clear paths to profitability, but mature businesses in stable industries should maintain conservative debt levels. The quality of debt matters too: long-term fixed-rate debt secured against appreciating assets is very different from high-interest short-term debt or overdrafts that can be withdrawn. Personal guarantees change the calculation entirely—even modest business debt becomes 'too much' if it's personally guaranteed and puts your home at risk. The fundamental question isn't whether the debt level looks concerning on paper, but whether you can reliably service it from trading cashflow with comfortable margin for error. If you're constantly worried about making next month's payments, if one lost customer or delayed invoice would push you into crisis, if you're relying on refinancing or new investment rather than trading profits to service debt, or if your cashflow forecasts show you'll struggle to meet obligations within six months, you probably have too much debt for your current business performance. The honest assessment many directors avoid is whether the debt is funding genuine growth and value creation, or whether it's simply keeping an unviable business artificially alive. If debt is growing faster than revenue or profits, if you're borrowing to cover losses rather than to fund profitable expansion, or if there's no realistic scenario where trading profits will eliminate the debt burden, then almost any level of debt is too much. If you're asking this question, it strongly suggests you already know debt levels are concerning, and the responsible course is to seek professional advice immediately from an insolvency practitioner or turnaround specialist who can objectively assess whether the debt burden is sustainable and what options exist for restructuring or reducing it before crisis becomes inevitable.