Determining your business’s capacity to borrow – working capital and quick ratios

Generally, a business’s working capital is calculated by subtracting their ‘current liabilities’ from their ‘current assets’. If this figure is found to be negative, it means a business cannot pay its bills, or self-fund its operations.

To determine the liquidity of a business, a lender may utilise the ‘quick ratio’, which divides the value of a business’s ‘quick’ assets by its current liabilities and is indicative of its ability to make loan repayments.

If the business has no working capital available once its bills have been paid, the ratio will be 1:1. Typically, a higher ratio means the business is in a stronger position and can pay off current liabilities.

It is always important to utilise the ‘quick ratio’ alongside other financial ratios and expert advice. If you want to find out more about your business’s capacity to borrow, reach out to Duo today. We are happy to talk financing.