Business owners guide
Business debt and leverage: when borrowing makes you richer, and when it sinks you
Debt is a tool that multiplies whatever is already happening. Used on a business that earns more than the debt costs, it builds wealth. Used to cover a business that does not, it speeds up the end.
What leverage actually does
Take an asset that costs CAD 500,000: a fit-out, a machine, a rental property. Pay cash and your return is whatever it earns. Borrow 60 percent at 7.5 percent and the picture changes.
| The asset earns | All your own money | 60 percent borrowed |
|---|---|---|
| 12% | 12% | 18.8% |
| 9% | 9% | 11.3% |
| 7.5% | 7.5% | 7.5% |
| 4% | 4% | -1.3% |
When the asset earns more than the interest rate, the borrowed money works for you and your return rises. When it earns exactly the rate, nothing is gained for the risk. When it earns less, the lender is still paid in full and the shortfall comes from you.
Illustration: 60 percent borrowed at 7.5 percent, interest only, before tax.
Four tests before you sign
- Does it earn more than it costs? Return on the asset against the interest rate, after tax on both.
- Is the debt covered? Operating profit divided by the yearly loan payments. On a CAD 300,000 loan at 7.5 percent over 10 years the payments are about CAD 43,706 a year. If the business makes CAD 55,000 before those payments, coverage is 1.26. Lenders set their own minimum and yours should be higher.
- Does it survive a bad year? Run it again with sales 20 percent lower and the rate two points higher.
- Does the term fit the asset? The loan should be repaid before the thing it bought wears out.
Our project feasibility model runs all four for a single project.
The right debt for the job
Most cash crises in healthy businesses come from using the wrong one.
- For timing gaps: stock, receivables, payroll
- Should swing up and down, and reach zero sometimes
- Wrong for equipment or losses
- For assets that last: equipment, vehicles, fit-out
- Fixed payments over the asset's life
- Keeps the line of credit free
- The most expensive money there is
- Daily or weekly repayments drain cash
- A sign the structure needs fixing
The tax side
- Interest is generally deductible when the money was borrowed to earn income from a business or property. What matters is what the borrowed money was used for, so keep it traceable. A loan that paid for a truck and a family holiday is only partly deductible, and proving which part is your problem.
- Keep personal and business borrowing apart. Where you have a choice, pay down personal debt, which is not deductible, before business debt, which is.
- Money you take from your own company is not free. A loan from the company to you generally has to be repaid within a set time after the company's year end, or it is added to your personal income. Regular "loans" that are never repaid are salary or dividends that have not been declared yet.
- Money you lend to your company can be repaid to you tax-free. Record it properly when it goes in.
Personal guarantees and security
Incorporating limits your liability until you sign a personal guarantee, and most small business loans require one. Know what you are signing:
- Is it limited to an amount, or unlimited?
- Does it cover this loan, or everything the company ever owes that lender?
- Is your spouse being asked to sign, and has your spouse had independent advice?
- What does the general security agreement cover? Usually everything the company owns.
These are negotiable more often than people think, especially as the business builds a record. A lawyer should read them before you sign.
Leverage in rental property
The same maths applies, with one addition: the mortgage payment includes principal, which builds equity but is not a deductible expense. A property can show a taxable profit while the cash flow is negative. Our rental property analyzer shows cash flow, return on your own cash and debt coverage side by side for three properties.
Test every purchase at a higher rate than today's. Renewals are where over-leveraged investors are caught.
Worked examples
Illustrations built from the kinds of situations we see. They are not client files, and the numbers are simplified.
Trucks on the line of credit
- The situation
- A contractor bought two trucks using the operating line. The line is now permanently full and payroll is tight every second week.
- The move
- Refinance the trucks into a term loan over their working life and return the line to its job.
- What it changes
- The same total debt, with payments matched to the assets, and the line available again for receivables.
A clinic fit-out
- The situation
- A practitioner plans a CAD 857,500 fit-out, 60 percent financed over ten years.
- The move
- Model it: ramp-up in the first two years, debt coverage in each year, and what happens if revenue is 20 percent lower.
- What it changes
- In the model, the lowest coverage is in year one. Knowing that before signing, the owner arranges a working capital cushion instead of discovering the gap in month eight.
The owner's "loan"
- The situation
- An owner has taken CAD 80,000 from the company over the year, recorded as a loan, with no plan to repay it.
- The move
- Decide before the deadline: repay it, or declare it as salary or a dividend and plan the tax.
- What it changes
- Declared properly and planned, the cost is known and can be spread sensibly. Left alone, the whole amount lands in the owner's income, with interest.
Mistakes to avoid
- Borrowing to cover losses without fixing what causes them.
- Funding long-term assets from the line of credit or a card.
- Judging a loan by the monthly payment instead of the total cost and the coverage.
- Signing an unlimited personal guarantee without reading it.
- Mixing personal and business borrowing so interest cannot be traced.
- Treating the company bank account as your own.
Your checklist
Tick as you go. Your progress is saved on this device.
Tools for this job
- Project feasibility modelReturn, payback, debt coverage and sensitivity for one project.Open
- Rental property analyzerCash flow and return on your own cash for three properties.Open
- Mortgage calculatorPayments and interest at any rate.Open
- Cash flow forecast, 13 weeksFree. See whether the payments fit.Open
Who does what
What The Accounting Doc does
- Model the borrowing before you commit
- Prepare the statements and forecasts the lender asks for
- Keep interest deductible and shareholder loans clean
- Monitor coverage and conditions every month
Who else you need
- Your lender or a commercial mortgage broker
- Rates, terms and approval.
- Business lawyer
- Guarantees, security and loan agreements.
Sources
- Canada Revenue Agency, Corporation tax rates
- Canada Revenue Agency, T4032-ON Payroll Deductions Tables, Ontario, effective 1 January 2026
- Office of the Superintendent of Financial Institutions, Minimum qualifying rate for uninsured mortgages
Figures checked on 13 November 2026. Tax rules change and your facts matter: this guide is education, not advice for your situation. We do not give legal, immigration or investment advice.