What is gearing in business finance?

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Gearing (sometimes called leverage) is the ratio of a company's debt to its equity. A highly geared business relies heavily on borrowed money to fund its operations and growth; a low-geared business is funded mainly by shareholders' capital and retained profits. Lenders and investors use gearing as a quick indicator of financial risk. How gearing is calculated The most common formula is total debt divided by total equity, expressed as a percentage. For example, a company with £400,000 of debt and £200,000 of equity has gearing of 200%. Some calculations use net debt (total debt minus cash) to give a more nuanced picture. There is no single threshold that defines "high" gearing — it varies significantly by industry. Capital-intensive sectors such as construction or manufacturing often carry higher gearing than, say, professional services firms. Why gearing matters to lenders A lender assessing a new credit application will look at gearing because it shows how much of a buffer exists for creditors if things go wrong. Very high gearing means existing debt obligations may already be stretching the business. Lenders may also impose a maximum gearing ratio as a financial covenant in the facility agreement, requiring the company to stay below a set level throughout the term of the loan. Balancing debt and equity Used sensibly, debt finance allows a company to grow without diluting shareholders' ownership. The key is ensuring that the returns generated by the borrowed capital exceed the cost of the debt. A short-term facility — like a Credicorp Business Loan or a draw on Credicorp Flex — can support a specific growth project or cash-flow gap without permanently increasing the company's long-run gearing profile. We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.