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Find out how Debt Impacts your Business

By February 25, 2013

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If you use both debt financing and funds from investors, you need to constantly watch how the level of debt you employ impacts your firm. Too little debt financing (which means too much investor financing) can lower your firm's return on equity to the investors. Too much debt, however, is even worse. Too much debt can lead a firm right into bankruptcy.

One very important issue for business owners is how much debt and equity they use for permanent financing. Not just for the occasional purchase of equipment or increases in working capital, but permanent financing to keep the doors open. One ratio that helps answer that question is the long-term debt to total capitalization ratio. When you calculate this ratio, you will get a percentage. The higher the percentage, the more debt financing you use. You should watch this ratio. If the percentage is on the rise, you may be depending too much on debt financing for permanent financing.

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