Most owners ask the wrong question when they go looking for capital. They ask “how much can I get?” The question that actually protects the business is “how much can I afford to pay back?”
Those are not the same number. A funder will sometimes approve more than your cash flow can comfortably carry — and if you take it, the payment that looked fine on the day you signed becomes the payment that squeezes payroll three months later. Knowing your own capacity before you borrow is how you avoid that. Here is how to figure it out.
Start with what actually leaves the account
Not revenue. Not profit on paper. The real number is your free cash flow — what is left after every operating cost is paid.
Pull three months of bank statements and, for each month, take total deposits and subtract everything that goes back out to run the business: payroll, rent, inventory, utilities, existing loan or advance payments, taxes, the owner’s draw you actually need to live. What remains is the cash the business genuinely has free. Average the three months so one strong or weak month does not distort the picture.
That average is the pool any new payment has to come out of. If it is thin, the answer is not a bigger loan — it is a smaller one, or none yet.
The coverage ratio: the number lenders use, and you should too
Lenders measure whether you can service debt with something called a debt-service coverage ratio. It sounds technical; it is simple:
Free cash flow ÷ total debt payments = coverage ratio.
If a proposed financing would cost you $4,000 a month and your free cash flow is $8,000 a month, your coverage ratio is 2.0 — you generate two dollars for every one dollar of payment. If free cash flow is only $4,800, your ratio is 1.2, and you are running tight.
A rough guide:
- Above 1.5 — comfortable. You have room to absorb a slow week without missing a payment.
- 1.25 to 1.5 — workable, but you have little margin for a bad stretch.
- Below 1.25 — risky. One soft month and the payment starts coming out of money you need for something else.
- At or below 1.0 — the payment consumes everything the business generates. Do not sign this.
Notice this cuts both ways. A funder uses the ratio to decide whether to approve you. You should use the exact same number to decide whether to accept.
Count the debt you already have
Capacity is not measured against a blank slate. If you are already carrying an advance or a loan, those payments come out of the same free cash flow first. New capacity is only what is left after existing obligations are covered.
This is the trap behind stacking. Each new advance is measured as if it is the only one, but they all draw from the same account on the same days. Three payments that each looked affordable in isolation can add up to more than the business produces. Add your existing payments into the math before you add a new one — not after.
Match the payment to how you actually earn
Two financings with the same total cost can feel completely different depending on structure.
A fixed daily or weekly payment is predictable but unforgiving — it comes out the same on your worst week as your best. A percentage-of-sales structure, like a credit card split, flexes with revenue: you pay less when sales dip. If your revenue swings — seasonal, project-based, weather-dependent — a payment that flexes protects your capacity in exactly the weeks a fixed one would strain it.
Capacity is not just a number. It is a number against a rhythm. Match the structure to how the money actually comes in.
The stress test worth doing
Before you sign, run one scenario: what happens to this payment in a bad month?
Take your slowest month from the last year — not your average, your worst. Would the payment still clear that month, with everything else you have to pay? If yes, the financing fits. If the only way it works is an average or good month, you are borrowing against optimism, and optimism does not clear ACH debits.
What healthy borrowing looks like
The point of all this is not to talk you out of financing. Used well, capital is how you take the contract, buy the equipment, or bridge the gap that grows the business. The point is to size it so the payment is comfortable, not just possible.
- Borrow against your real free cash flow, not your revenue.
- Keep the coverage ratio above 1.25, ideally above 1.5.
- Count existing payments first.
- Stress-test against your worst month, not your average.
- Match the structure to how you earn.
Where to go from here
Not sure what your business can comfortably carry? Send us three months of statements. We will work out your real free cash flow and tell you what a responsible amount looks like — which is sometimes less than you would be approved for elsewhere, and that is the point.
Related reading: The 13-week cash flow forecast · Factor rate vs. APR, explained
What is a good debt service coverage ratio?
bove 1.5 is comfortable — you generate more than a dollar and a half of free cash flow for every dollar of payment. Between 1.25 and 1.5 is workable but tight. At or below 1.0, the payment consumes everything the business produces, which is a signal not to sign.
How do I calculate how much financing I can afford?
Start with your real free cash flow — total deposits minus every operating cost, averaged over three months. Divide that by the proposed total monthly payments, including any financing you already carry. Keep the result above 1.25.
Does existing debt affect how much I can borrow?
Yes. Existing payments come out of the same free cash flow first, so new capacity is only what is left after they are covered. Counting existing obligations before adding a new one is what prevents overextending.
