How much debt can my business carry?

Two tests, one answer

A lender sizing a loan to an established business is asking two different questions. The first is whether the business can make the payments. That is the debt service coverage ratio: cash flow available to pay debt, divided by the principal and interest due in a year. The second is how much debt the business can hold against its earnings, measured as total debt divided by EBITDA. Coverage is about this year's cash. Leverage is about what happens if the business has a bad stretch and the loan has to be repaid, refinanced or recovered from a sale of the company.

The two tests guard against different risks, so lenders run both and lend the smaller result. A business with a long, cheap loan can pass coverage easily and still be over-levered. A business with modest debt can fail coverage if the loan amortizes quickly. Neither test alone tells you your number.

Your debt capacity is the lower of what coverage allows and what leverage allows, less the debt you already carry.

The coverage test, worked through

Start with the cash flow a lender will count. For banks and SBA lenders that is usually EBITDA, adjusted for the add-backs they accept, less cash taxes, less the capital spending the business has to keep making, and less owner distributions that are not optional. Lenders that test fixed charge coverage start from the same cash flow, add rent and lease payments back, and then count them as fixed charges alongside debt service, so a business that leases its premises and equipment is tested on everything it must pay.

Suppose that cash flow is 1,250 a year. At the 1.25x minimum banks commonly apply, the business can support annual debt service of up to 1,000. That 1,000 has to cover every loan: the new one, any equipment notes, the existing term loan, a seller note that is paying, and the annualized payments on any merchant cash advances. How much principal 1,000 a year supports then depends on the interest rate and on how long the loan amortizes. The same payment repays more principal over a longer schedule, which is why an SBA acquisition loan, with maturities up to 10 years, often sizes larger on coverage than a conventional loan that amortizes faster. SBA's own minimum is 1.15x, but from 1 October 2026 a change of ownership must show 1.25x on historical results, and its loan amortizes over no more than 10 years except for any real estate share.

Two details catch owners out. Lenders test coverage on history, usually the latest full fiscal year and the trailing twelve months, not on next year's budget. And for SBA loans they also run a global test that adds each guarantor's personal income and personal debt, because every owner of 20% or more personally guarantees the loan; SBA requires at least 1.0x on that global basis. A business that clears the business-level test on its own can fall short once an owner's mortgage and car payments are counted against the salary the business pays them.

The leverage test, worked through

Take a business with EBITDA of 1,000 after the add-backs a lender accepts. At 2x, senior debt would be 2,000. At 3.5x it would be 3,500. That range is where senior cash-flow lenders to lower-middle-market companies commonly land. Where a particular business lands inside it depends on what the lender thinks its earnings would look like in a bad year.

• Size of EBITDA. Larger earnings are harder to lose to one bad contract or one departed employee, so larger companies tend to sit higher in the range.
• Recurring revenue. Service agreements, subscriptions and contracted work earn more leverage than project or one-off transactional revenue.
• Customer concentration. A customer that could leave with a large share of profit pulls the multiple down.
• Cyclicality and margin history. Lenders look at how far earnings fell in the last downturn, not how high they rose in the last upturn.
• Capital intensity. A business that must reinvest heavily has less cash to repay debt than its EBITDA suggests.
• Management depth. Earnings that depend on one person carry more risk than earnings a team produces.

Senior leverage is not the ceiling on total debt. Unitranche lenders stretch further than senior lenders in a single loan, and mezzanine debt or seller paper can sit behind a senior loan. Each layer above senior costs more, and the whole stack still has to pass coverage.

Running both tests on one business

The table runs both tests on the same illustrative business: EBITDA of 1,500 after accepted add-backs, cash flow available for debt service of 1,250 after taxes and required capital spending, and existing debt of 1,000 with annual payments of 300.

Which column binds depends as much on the loan's terms as on the business.

How add-backs change the answer

Add-backs move both tests at once, and the leverage test multiplies them. With senior leverage of 2x to 3.5x, every 100 of add-back a lender accepts adds between 200 and 350 of debt capacity, and every 100 it rejects takes the same amount away. That is why the largest disagreement in most files is not the rate or the multiple but the EBITDA the multiple is applied to.

Lenders credit add-backs they can verify and that will not recur: a one-time legal settlement, a documented relocation, an owner's salary above what a hired manager would cost, personal expenses run through the business. They discount add-backs that are really forecasts: savings not yet made, costs of a customer already lost, synergies with a company not yet owned, or a one-time expense that appears every year. The EBITDA add-backs page sets out which is which. An add-back with an invoice, a contract or a payroll record behind it is worth something. One without is worth little.

What counts against the capacity you have

Debt capacity is a total, and lenders count everything that takes cash out ahead of them.

• Existing term debt and equipment notes count in full, in both tests.
• Drawn lines of credit usually count toward leverage, and the line's own covenants may limit new debt.
• Merchant cash advances count at their annualized daily or weekly payments. A business carrying several of them often fails coverage while its EBITDA looks healthy, and consolidating advances into term debt can free real capacity. SBA will not refinance an active merchant cash advance or a factoring agreement; from 1 October 2026 an advance becomes eligible only once converted to a term loan that has amortized for at least 24 months with no new advance since. Any debt SBA does refinance must be current for the last 12 months, and the new payment must be at least 10% lower.
• Seller notes count if they pay. A note on full standby behind an SBA loan makes no payments for the life of that loan, so it does not reduce coverage.
• Rent and leases sit inside fixed charge coverage and, for some lenders, inside an adjusted leverage figure.

What raises the number, and what does not

Some levers change what a lender will offer. A longer amortization raises the coverage answer. Real estate and long-life equipment can be financed on their own terms, for example real estate under 7(a) with maturities up to 25 years or through SBA 504, which takes pressure off the operating loan. A 504 borrower must occupy at least 51% of an existing building, or 60% of new construction, and typically contributes 10% of the project; since July 2026 the 504 and 7(a) limits are counted separately. A current set of figures, with a year-to-date P&L through last month-end, lets the lender size on today's earnings rather than last year's. More equity does not raise what the business can carry, but it reduces the loan needed and improves how a lender reads the whole structure.

Other things do not move it. Projections alone rarely increase a loan, because lenders size on what the business has earned. Revenue growth without margin growth does not help the leverage test. And a business worth far more than its debt still has to pay that debt from cash flow; value is the lender's second way out, not its first.

How Transparent sizes it before a lender does

Before a file goes to market, Transparent's underwriting runs both tests on the figures a lender will see: EBITDA with each add-back documented or dropped, every existing obligation from the debt schedule, and the proposed loan at realistic terms. Once a borrower's documents are in, the full lender package — financing model, lender presentation, blind teaser and underwriting memo — is built in a day. The model shows coverage and leverage for each structure considered, so the number you take to lenders is one they can reproduce.

The book holds 1,148 lenders that write term and private credit, 278 that write SBA 7(a) and 504, and 235 that write asset-based lending and lines. That range matters here, because the lender whose own sizing method fits your business is the one that will offer the most sensible amount.