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Financial Leverage – The Debt to Assets Ratio Demystified

Key Points

• The debt to assets ratio reveals how much of a business’s assets are debt-financed.
• High ratios (0.7+) increase vulnerability — especially if slow SBA funding forces reliance on interim debt.
• Delays can drive missed opportunities (e.g., $300K+ lost sales) and inflate liabilities.
• APR alone is misleading; true cost = interest + opportunity loss – cycle gain.
• Capital Source connects leverage ratios with true cost analysis to balance risk and growth.

Introduction

Imagine chasing a low-APR SBA loan, only to miss $300K in seasonal sales because approval took 90 days. This is where financial leverage meets opportunity cost.

The debt to assets ratio measures how much of your business (cash, equipment, receivables, property) is funded by debt versus owned outright. Investors use it to assess stability, lenders use it to evaluate repayment risk, and owners should use it to guide growth strategy.

But leverage isn’t just about percentages on a balance sheet. Funding speed and opportunity costs can amplify or erode your ratio’s impact. At Capital Source, we integrate leverage metrics into our True Cost framework, helping you avoid SBA delays that drag profitability.

Leverage + True Cost in Action

Debt to Assets Ratio = Total Liabilities ÷ Total Assets

A company already at a high ratio (0.75+) faces risk if it stacks more liabilities waiting for an SBA loan.

Example (Loan Size: $588K):

• SBA Loan (11.5%, 180 days):
  • Direct debt cost = ~$84K–$96K.
  • Lost gross margin = $500K.
  • True Cost = ~$600K.
  • Liabilities rise, pushing the ratio even higher.
• Bridge Loan (1.33 factor ≈ 34%, 3 days):
  • Direct debt cost = ~$200K.
  • No margin lost; cycle boosted by 25–30%.
  • True Cost = ~$200K.
  • Ratio impact contained, growth preserved.

Insight: The higher your leverage, the more important it is to avoid delays. Slow funding inflates liabilities without generating returns.

The Basics: Formula and Calculation

Formula:
Debt to Assets Ratio = Total Liabilities ÷ Total Assets

• Total Liabilities: All obligations, short and long-term (loans, payables).
• Total Assets: Cash, inventory, receivables, equipment, property, intangibles.

Example: $750K liabilities ÷ $1M assets = 0.75 (75%). That means 75% of assets are debt-financed. A high ratio like this magnifies the cost of funding delays.

Steps to Calculate:

1. Pull liabilities and assets from your balance sheet.
2. Divide liabilities by assets.
3. Multiply by 100 for a percentage.

Interpreting the Ratio

• Low (0.2–0.4): Conservative, stable, high flexibility.
• Moderate (0.4–0.6): Balanced growth potential with manageable risk.
• High (0.7+): Heavy debt reliance, vulnerable to delays and opportunity losses.

High ratios are not inherently bad if debt fuels fast-turning assets. But when approvals drag (like SBA’s 90–180 days), liabilities pile up while opportunities slip away.

True Cost + Leverage Visualization

True Cost Formula:
True Cost = Debt Cost + Opportunity Cost – Cycle Gain

When paired with the Debt to Assets Ratio, this shows how:

• High ratios + slow funding = rising liabilities + lost profit.
• Balanced ratios + fast funding = stable leverage + preserved margins.

This integrated view reveals the real impact of borrowing decisions.

Leverage Impact on Opportunities

Comparing with Other Metrics

Use leverage alongside other measures for a full picture:

• Debt to Equity: Funding mix.
• Interest Coverage: Ability to service debt.
• Current Ratio: Short-term liquidity.
• DSCR (Debt Service Coverage Ratio): Cash-based repayment capacity.

Capital Source combines these with leverage to align financing with growth, not just APR savings.

Conclusion

The debt to assets ratio is more than a number — it magnifies the impact of funding speed. A high ratio business relying on a delayed SBA loan risks ballooning liabilities and missed revenue, while a fast bridge solution can actually stabilize leverage.

At Capital Source, we integrate leverage ratios into our True Cost Calculator so you can see how both structure and timing affect profitability.

Run your ratios through our True Cost Calculator and see how fast funding can protect growth and keep your leverage sustainable.

At Capital Source, we don’t just watch the market — we build financing solutions that adapt with it.

📞 Contact us today to explore options customized to your business needs.

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