So, imagine this: a business owner stands in their office, looking at a fresh loan approval in one hand and a stack of bills in the other. Borrowing could get them over the next financial hump, maybe even give them a shot at expansion.

But what if this loan adds weight instead of strength? For small businesses, debt can be a powerful tool or a huge liability. And sometimes, it’s a fine line between the two. Over 80% of small businesses borrow money at some point , and most business owners feel the pull.

Debt can support growth, smooth out cash flow, or fund a much-needed upgrade. But here’s the twist—not all debt is good debt. So how do you tell the difference? That’s where the business debt ratio steps in.

With this simple calculation, a business owner can tell if their debt strengthens their business or if they’re inching toward risky territory. This guide breaks down how to calculate that ratio, why it matters, and how to use it wisely. Let’s see if debt is working for you—or against you.

What Is the Business Debt Ratio, and Why Should You Care?

The business debt ratio acts like a quick test to see if debt levels stay within the limits of a business’s financial health. The math is simple: add up your assets, add up your liabilities, and divide assets by liabilities. If the result is over one, it means more assets than debts—a healthy sign.

A number close to or below one? That’s where things get shaky. This ratio isn’t just a number buried in a financial report. Lenders take a hard look at it before approving loans.

Investors glance at it when they consider funding. And, for the business owner, this number reveals if they’re in control of their debt—or if debt is creeping up, bit by bit.

Real-World Example: Amazon-Based Business Debt Ratio

For Amazon-based businesses, the debt ratio serves as a quick-yet-powerful financial snapshot. Here’s how assets and liabilities often break down:

Assets

• Cash in the bank and Amazon reserved funds.

• Inventory sits as a large asset, but it’s not always cash-ready.

Liabilities

• Credit Card Debt often funds inventory purchases or marketing.

• Loans fund large equipment buys or expansion costs.

• Tax Obligations for payroll or collected sales tax.

This mix of assets and liabilities shows up in most eCommerce businesses, where inventory and marketing swallow up a big share of the budget. Smart Amazon sellers keep an eye on the business debt ratio to stay within a safe range.

How to Calculate Your Business Debt Ratio

Calculating a business debt ratio sounds complicated, but it’s not. Here’s the formula:

Business Debt Ratio = Total Assets / Total Liabilities

What counts as assets? Think cash in the bank, inventory, property, equipment, and funds tucked away in reserve accounts. And for liabilities? This includes any credit card balances, loans, taxes, and outstanding bills.

Example Calculation:

Let’s put this formula to work with an example. Picture a small Amazon seller managing their online store:

Assets

• Cash: $35,000

• Amazon Reserved Funds: $45,000

• Inventory: $150,000

Liabilities

• Credit Cards: $75,000

• Amazon Loan: $90,000

• Taxes: $4,000

Add Up Each Category

• Total Assets = $35,000 + $45,000 + $150,000 = $230,000

• Total Liabilities = $75,000 + $90,000 + $4,000 = $169,000

Divide Assets By Liabilities

• Business Debt Ratio = $230,000 / $169,000 ≈ 1.36

With a 1.36 ratio, the business has more assets than liabilities—a strong place to be. But what if the numbers tell a different story?

Why a Good Business Debt Ratio Matters

The goal is to keep your business debt ratio above one. Why does this matter?

• Above 1: More assets than debts, so it’s a thumbs-up. Lenders see you as a safe bet, and you get a solid foundation.

• 1 or Below: Now, you’re treading into risky territory. If assets only barely cover liabilities, it leaves the business vulnerable to unexpected costs. Below one? That’s a red flag.

For retail and eCommerce businesses, inventory often throws in an extra twist. Not all inventory moves quickly, and its cash value can drop over time.

To stay on the safe side, use only 60-70% of inventory value in the debt ratio calculation. That way, the ratio reflects a more realistic picture of financial health.

The Smart Way to Include Inventory in Your Debt Ratio

Inventory can be a tricky part of the picture. On paper, it’s a big asset, but if products sit on the shelves, their value doesn’t feel very “liquid” (meaning cash-ready).

For businesses relying on inventory, this number can skew results and create a false sense of security. So, what’s the safe move? Try calculating with only a portion of your inventory’s value. Here’s what that looks like with a more conservative approach, using only 60% of the inventory value:

Adjusted Assets

• Cash: $35,000

• Amazon Reserved Funds: $45,000

• Inventory (60%): $90,000 (60% of $150,000)

So, Adjusted Assets = $35,000 + $45,000 + $90,000 = $170,000

Then recalculate:

• Adjusted Business Debt Ratio = $170,000 / $169,000 ≈ 1.01

With a ratio of 1.01, there’s barely a cushion left. Now, the business has just enough assets to cover its debts, which can feel like tightrope walking without a safety net. This conservative number encourages business owners to pay close attention and avoid risks that could push them over the edge.

Four Signs You’re Using Debt Wisely

Wondering if debt is working in your favor? These four signs reveal if your debt strategy boosts your business’s growth without risking financial stability.

1. You Keep Your Ratio Above 1

A ratio above one shows the business manages debt well. It signals more assets than liabilities, which keeps things steady even if the business faces a slow month or surprise expenses.

2. You Prioritize Low-Interest Debt

Low-interest debt, like certain loans, keeps things manageable. High-interest debts, especially credit cards, can pile up fast and push the business into higher-risk territory.

3. You Keep Cash Reserves Handy

Cash reserves give the business a buffer against unexpected costs without needing more debt. A healthy cash flow strengthens the debt ratio and avoids a spiral of reliance on borrowing.

4. You Invest in Appreciating Assets

Some assets, like equipment or even real estate, gain value over time. By building these assets, the business sets up a stronger financial future that will continue to support a healthy debt ratio.

What to Do if Your Business Debt Ratio Is Too Low

If your business debt ratio dips too low, it signals a need for a quick change in strategy to avoid financial strain. Here’s how to cut costs, explore new revenue options, and stabilize your debt balance for a healthier financial footing.

1. Cut Out Extra Expenses

Reducing costs helps. Look at non-essential spending and find areas to trim. Subscriptions, extra office supplies, or luxury items may not add much value but could improve the debt ratio once removed.

2. Hold Off on More Debt

If the business debt ratio dips below one, adding more debt can add fuel to the fire. Instead, let go of the idea of “quick fixes” and focus on existing resources first. New debt often leads to higher interest payments, piling more pressure on cash flow.

3. Find Fresh Revenue Streams

Sometimes, a new income source can make a big difference. Adding a new product line, testing out subscription services, or exploring partnerships for cross-selling can all increase revenue, add to assets, and lift the debt ratio.

4. Consider an Equity Partner

If other efforts don’t work, an equity partner might help. An equity partner injects cash without adding debt, balancing the debt ratio and bringing new ideas to the table.

Making Debt Work for You: A Business Owner’s Toolkit

This toolkit offers practical tips to help business owners use debt strategically rather than letting it take over. From setting borrowing limits to building cash flow, these insights provide a solid plan for keeping debt manageable and effective.

Set Limits Before Borrowing

Set clear limits on debt before borrowing. Choose a maximum debt ratio and stick to it. Having a limit in mind keeps spending from spiraling and leaves room for flexibility when needed.

Review Your Ratio Every Quarter

Quarterly reviews of the debt ratio make a difference. A regular check-in reveals trends and gives the business time to course-correct before small issues turn into larger ones.

Prioritize Predictable Cash Flow

Debt works best with steady cash flow. If sales vary month to month, consider reducing debt. Stable cash flow builds a stronger debt ratio and reduces reliance on borrowing.

Keep Accurate Bookkeeping with Professional Support

Accurate bookkeeping is essential for tracking debt and maintaining financial clarity. Use a professional service like Tall Oak Advisors to ensure your records are precise and up-to-date.

With reliable balance sheets, you can easily spot trends in your debt ratio and make informed decisions based on accurate data. Knowing your numbers are correct gives you confidence in managing debt effectively.

Conclusion: Keep Your Business Debt Ratio in Check

The business debt ratio isn’t just another number; it’s a real indicator of how well the business handles debt. Keeping it above one and checking it regularly keeps you in control. Watch your cash flow, keep an eye on inventory, and take time each quarter to make sure the numbers stay in the green.

Debt can serve a purpose and support growth, but only if managed wisely. Track the debt ratio, keep debt working for you, and watch the business thrive with a+ solid financial foundation!