Oakridge Business Loans, a small-business funding broker in Bellingham, WA, explains the debt-to-equity ratio: total liabilities divided by owner's equity, taken from the balance sheet and worked out by hand. The calculator on this page estimates a new loan's monthly payment, total interest and total repaid. Lenders set actual rates and terms.
The debt-to-equity formula
Debt-to-equity ratio = total liabilities ÷ total owner's equity. Both figures come from the balance sheet. Total liabilities include loans, lines of credit, equipment notes, credit cards, accounts payable and other amounts owed. Owner's equity is total assets minus total liabilities: what would be left for the owners if every debt were paid.
Some analysts use only interest-bearing debt in the top line instead of all liabilities. Either is fine, as long as you know which one a lender is using and compare like with like.
A worked example
An illustration with made-up round numbers, not a real business or offer. A shop's balance sheet shows total assets of $300,000 and total liabilities of $180,000.
- Owner's equity = $300,000 − $180,000 = $120,000.
- Debt-to-equity = $180,000 ÷ $120,000 = 1.5.
- Read it as: for every dollar the owners have in the business, creditors have $1.50.
If equity is zero or negative, the ratio stops being meaningful. That is a sign the business owes more than it owns on paper, which a lender will notice before any ratio.
How a new loan changes the ratio
Borrowing adds to liabilities. If the shop above borrows $30,000 and keeps the cash, assets and liabilities both rise by $30,000 and equity stays at $120,000, so the ratio becomes $210,000 ÷ $120,000 = 1.75. Spending the money on equipment does not change that arithmetic on day one; the new asset replaces the cash. Over time, payments reduce the liability and profits retained in the business raise equity.
Using the calculator
The calculator does not compute the ratio; use the steps above for that. It estimates the cost of the new debt itself. Enter:
- Amount: the amount you plan to borrow.
- Interest rate: the yearly rate quoted in an offer, or any rate you want to try.
- Term: the number of months.
It returns the monthly payment, the total interest and the total repaid for a fully amortizing loan. Fees, balloon payments and variable rates are not included, so check any real offer's total of payments separately.
What the ratio signals to a reviewer
There is no single good debt-to-equity ratio for a small business. What reviewers consider normal depends on the industry and the business: a contractor with a yard full of financed machines will carry more debt relative to equity than a consulting firm with few assets. A lender looks at the trend over several years, at how it compares with similar businesses, and above all at whether cash flow covers the payments.
Use the ratio to understand your own balance sheet before a lender does. Term loans, how underwriting works and the other guides explain where it fits.
By Oakridge Business Loans · Updated