Gearing

How much of the business is funded by debt rather than by its owners.

What it means

Gearing compares debt with equity. High gearing means a large proportion of funding is borrowed.

Why it matters

Debt is cheaper than equity and it is inflexible: interest is due whether or not you trade well. High gearing magnifies both good and bad years, and it is what lenders look at before lending more.

What it looks like in practice

Lenders usually look at gearing alongside interest cover — profit divided by interest — which shows whether the business can service what it already owes.

What to watch out for

Gearing that looks fine because a director's loan is counted as equity. Lenders will reclassify it, and so should you.

Where to get proper advice

Your accountant. This is exactly the kind of question they answer in ten minutes and most owners never ask.