Safe Working Capital Debt: A Simple Leverage Checklist for SMEs

Working capital debt is usually “too much” when: (1) it can’t be cleared from normal trading in 12–24 months, (2) repayments or interest take more than ~15–20% of steady annual revenue, or (3) you’re repeatedly using personal funds or home‑loan redraw to plug gaps.

This checklist helps you decide, in under an hour, whether your debt level is broadly safe, borderline, or in the danger zone.

Quick visual cues make it easier to see when working capital debt is drifting into the danger zone.

Step 1: Map what you actually owe

Before ratios, you need a clean picture.

List each facility:

• Overdraft / line of credit
• Credit cards
• Short‑term working capital loans
• Trade finance / supplier terms
• ATO payment plans

For each, note:

• Limit and current balance
• Interest rate (rough range is fine)
• Security (business assets only, or home as well?)
• Minimum repayment and actual average repayment

If these are fuzzy, that’s your first red flag. Lenders will build their own picture from BAS, bank statements and accounts anyway (see /insights/bas-bank-statements-management-accounts-working-capital-loan).

Quick worked example

• Revenue: $1.2m p.a. (GST‑exclusive)
• Overdraft: $150k limit, usually sitting at $130k
• Line of credit: $80k, always maxed
• ATO payment plan: $40k, $3k/month
• Total working capital debt: $250k

We’ll use this example through the checklist.

Step 2: Three core "is this too much?" tests

Run these simple tests. If you fail one, it’s caution. Two or more, you’re likely over‑leveraged.

Test 1: Debt‑to‑revenue ratio

Rule of thumb for pure working capital (not equipment or property):

• Generally comfortable: total working capital debt ≤ 10% of stable annual revenue
• Borderline: 10–20%
• High risk: > 20%

Example: $250k ÷ $1.2m ≈ 21% → already in the high‑risk band.

Industry matters here. Construction and retail often run higher working capital swings than professional services. For context on typical patterns, see /insights/industry-specific-working-capital-patterns-risks.

Test 2: Can trading clear it in 12–24 months?

Ask: If I froze growth and kept trading normally, how quickly could I pay this down just from business profit and owner drawings I can actually spare?

• Safer: realistic pathway to clear most of it within 12–24 months
• Risky: needs 3+ years, or assumes perfect conditions

Example: If you can spare $8k/month from cashflow, that’s $96k/year. Clearing $250k would take ~2.6 years, before interest. That’s stretching into danger.

Test 3: Working capital vs buffers

From our broader guidance for self‑employed clients, a practical overlap buffer is:

• 2–3 months of household expenses, plus
• 1–2 months of business overheads,
• Held outside your working capital facilities (e.g. separate savings, not just unused overdraft) (see /insights/working-capital-basics-structures-costs-safe-limits).

Red flags:

• You have < 1 month of combined personal + business expenses in true cash buffers
• You’re routinely dipping into home offset/redraw for wages, BAS or stock

If your business only survives because your home loan bails it out, you’re over‑leveraged even if the ratios look okay.