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How Much Debt Is Too Much?

Financial EfficiencyEasy money got a lot of businesses in trouble. Here’s some sober calculus.

You shouldn’t borrow what you can’t pay back–that’s how we got into this whole economic mess in the first place. But figuring out how much debt you can take on–or, put another way, how much a lender is willing to extend (for they may not be the same thing)–is a bit tricky.

Obviously, you need cash to cover your principal and interest payments. But how much exactly?

First, estimate the amount of money you need by use (working capital, equipment, real estate, etc.). Assume for the moment that you will use “term” loans, with monthly payments of principal and interest over a certain time period, similar to the loan on your house.

This article originally appeared on Forbes.com.

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