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 cyprus email list 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.
Making an annual business plan is essential to measure debt capacity.
Measure my SME's borrowing capacity more accurately
The figures above provide general parameters for establishing a healthy borrowing capacity for a small or medium-sized company. However, it is always advisable to carry out a personalized analysis, since companies have special circumstances that influence their ability to borrow.
To measure this parameter more accurately, it will be essential to draw up a business plan for the company . This should put on one side of the scale a realistic forecast of the income that it will be able to generate throughout the year. This data must be compared with:
Periodic fixed costs .
Tax obligations ( tax payments ).
Financial expenses (derived from the request for loans, leasing or other financing tools).
Costs of acquiring raw materials or services necessary to produce the goods or services that allow us to invoice.
An adequate level of debt would be one that would allow us to comfortably meet these payment commitments. To do this, we must not only take into account recurring income , but also:
Value of the company's assets , which if sold would generate a volume of income with which we could meet payment commitments.
Cash flow level . That is, the liquidity available in the company's account. Financial advisory experts establish that a healthy SME would be one capable of responding with its cash flow to payment commitments acquired within a year.
Tips for maintaining a healthy debt level
To maintain a healthy level of debt in an SME, we must periodically review the fixed costs of our corporation. A good example of this would be the electricity required for the operation of the company. We must periodically review what other suppliers offer us, with the aim of reducing or controlling this type of fixed costs at all times.
A second piece of advice is to make a proper assessment of our assets . Some SMEs own offices, equipment, warehouses, etc. What is their real value on the market? If you wanted to sell them and obtain liquidity, how much would you get and how long would it take to get it? An accurate assessment of this parameter will allow us to acquire a higher or lower level of debt without compromising the company's activity.
Another aspect to consider is the ability to restructure your business . Can you easily focus on the most profitable production areas in a short period of time? Could you sell business lines that you consider less operational quickly? At what price? Could you quickly open business lines that you detect will offer high profitability?
And finally, it is advisable to do business with reliable companies . That is, to be certain that we will get paid. When calculating our borrowing capacity, we always take into account our ability to generate income. This includes the real certainty that we will get paid for our work or sales. Otherwise, we will generate a cash flow gap that could put future payment obligations at risk, negatively impacting our borrowing capacity.
The borrowing capacity of an SME will therefore depend on various factors. And, don't forget, a good general rule is not to enter into payment commitments greater than 30-35% of our income-generating capacity.
