Warning signs your business has too much debt

When borrowing stops being the answer

Finance used well is a tool; finance used to paper over a structural problem becomes the problem. Most companies that get into debt trouble do not do so suddenly — the signals build over months, and the temptation at each stage is to borrow a little more to get past the current squeeze. Recognising the warning signs early is what separates a manageable restructure from a crisis. This guide lays out the signals so you can act while you still have options.

The theme running through all of them is the same: when new borrowing is servicing old borrowing, or when the cost of debt is eating the cash the business needs to operate, the issue is no longer timing — it is the debt load itself.

The gearing signal

Gearing measures debt against equity — how much of the business is funded by borrowing versus owners' capital. Rising gearing means each new pound of debt rests on a thinner cushion of equity, leaving less margin for a bad month. There is no universal danger line; it varies by sector and how stable your cash flow is. What matters is the trend and the comfort level: gearing climbing quarter after quarter, with repayments consuming an ever-larger slice of income, is a clear amber light.

Watch the debt-to-equity ratio over time rather than at a single point. A one-off spike to fund a clear, return-generating investment is very different from a steady climb funding ongoing losses — the latter is the pattern that ends badly.

The coverage and cash-flow signals

The sharpest real-world signal is debt service coverage — whether trading cash comfortably covers the repayments. When coverage drops toward 1.0, every penny of cash is going to service debt, leaving nothing for stock, wages or the unexpected. At that point a single late-paying customer or quiet week tips you into a missed payment.

Other cash-flow red flags travel together: relying on an overdraft permanently rather than dipping in and clearing it; routinely paying suppliers late to free up cash for loan repayments; arrears creeping in on existing facilities; and the clearest one of all — borrowing specifically to make repayments on other borrowing. That last one is the debt spiral in plain sight, and it is the signal to stop and restructure, not refinance into more of the same.

What to do instead

If the signals are flashing, the move is to restructure before a missed payment forces the issue. Refinancing can consolidate several expensive facilities into one cleaner, more affordable structure — genuinely helpful when it lowers the total cost and the monthly burden, and our how to refinance business debt guide covers doing it well. But refinancing only helps if it reduces the load; rolling the same debt into a new wrapper at a similar cost just buys time.

Where the problem is deeper than structure, turnaround finance and professional advice are the right route — and the honest distinction between funding a return and plugging a loss is in our growth vs survival borrowing guide. A responsible lender will not pile more debt onto a company showing these signals, because that helps no one. This guide is educational and not financial advice; if you are in difficulty, seek qualified advice early.