Introduction

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Debt often carries a negative perception. Many entrepreneurs see it as a risk or even a stigma. But when used responsibly, the right amount of debt can be a powerful tool to grow your business. This is what we call “leverage”. The key is knowing how much debt your business can afford without putting its financial health at risk.
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What Do We Mean by “Debt Affordability”?

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Debt affordability is your business’s ability to take on and repay new debt comfortably. It’s about understanding your current financial health, forecasting your future cash flows, and maintaining a positive credit record so that lenders see you as a trustworthy borrower.

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1. Your Current Financial Situation

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Before applying for a loan, do a financial “health check”:
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• Debt Service Coverage Ratio (DSCR): Compares your gross profit or income (EBITDA) to your loan repayments and leases. A DSCR above 1 means you’re generating enough to cover your obligations, but often lenders will require a much higher DSCR (e.g., above 1.5), in the eventuality of a shock to your revenues, higher expenses, etc.
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• Debt-to-Equity: This ratio shows how much of your business is financed by debt compared to your own capital. A lower ratio is generally safer, as it means you rely more on your own equity. However, the “safe” range varies by sector. For example, agriculture and manufacturing businesses, which often require significant investment in land, equipment, or infrastructure, may carry higher debt-to-equity ratios of up to 2:1 or more. Trading and retail businesses, which depend heavily on working capital and face more volatile revenue cycles, are usually expected to stay below 2:1. Service-based businesses, which require fewer fixed assets, often fall in the 0.5:1 to 1.5:1 range.
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• Debt-to-Assets: Measures the percentage of a company's assets that are financed by debt rather than equity, indicating a company's leverage and financial stability. It is calculated by dividing a company's total liabilities by its total assets. A higher ratio signifies more debt and higher financial risk, as creditors own a larger portion of the company's assets, while a lower ratio suggests more financial stability and reliance on equity.
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‍Practical Tips:
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• Start small with your first loan to build a repayment track record. Even a short-term working capital facility can strengthen your credit profile.
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• Keep repayments below 30–40% of your monthly operating profit to avoid strain.
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• Regularly update management accounts so you can track your ratios in real time.

2. Your Future Cash Flow

Debt should work for you, not against you. That means forecasting cash flows carefully.
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• Project your income and expenses: After taking the loan, will the investment (new equipment, stock, etc.) generate enough additional revenue?
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• Stress-test your numbers: What if sales drop 10%? What if input costs rise 15%?
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• Align loan terms to cash cycles: For example, if you supply large retailers who pay in 60 days, ensure your repayment schedule matches that.
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Practical Tips:
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• Use a cash flow forecast spreadsheet before committing to any loan.
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• Choose repayment schedules that mirror your revenue cycle (weekly, monthly, or longer).
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• Always keep a buffer reserve (e.g., one instalment saved) in case of delays from clients.
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3. Your Creditworthiness
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Your credit score and repayment history directly influence the cost and availability of debt.
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• A strong repayment record = lower interest rates and better access to capital.
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• Missed or late payments damage your credibility and make future loans more expensive.
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Practical Tips:
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• Never miss a repayment - even if you can’t pay in full, communicate early with your lender to restructure.
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• Separate personal and business accounts so your repayment history builds your business’s credit profile.
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• Review your credit report annually to check for errors or outdated entries.

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Building Affordability Step by Step
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Think of debt like a ladder: you climb progressively, not in one leap.
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• Start Small: Take a manageable first loan and repay it on time to build your track record.
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• Understand the Impact: Track how debt affects your cash flow, do you still have room to pay suppliers, salaries, and yourself?
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• Scale Up Gradually: As your business grows and your credit improves, take on larger facilities aligned with your growth plans.
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• Use Debt for Growth, Not Survival: Apply debt to revenue-generating investments (inputs, equipment, contracts) rather than plugging recurring losses.
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Final Word‍

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Debt is not the enemy… mismanaged debt is. By starting small, proving your repayment ability, and aligning loans with your business’s growth, you can build affordability over time. Lenders reward consistency. Your track record today is your ticket to bigger opportunities tomorrow.

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