Quick answer
Gearing is the proportion of a business funded by borrowed money compared with the owners' own funds. It's usually expressed as a gearing ratio, calculated either as debt divided by equity or as debt divided by debt plus equity, and the two formulas give different numbers for the same business. Lenders use gearing to judge how much cushion sits between their loan and a loss, and some loan agreements set a maximum.
Key points
- High gearing means debt does most of the funding; low gearing means equity does
- Two common formulas exist, so always check which one is being quoted
- Bank facilities can include a gearing covenant you must stay under
- Negative gearing is a separate tax idea about investment property losses
How much of your business belongs, in effect, to your lenders? That’s the question gearing answers. Gearing describes the balance between borrowed money and owners’ money in funding a business: a highly geared business runs mostly on debt, a lowly geared one mostly on its owners’ capital and retained profits.
How is gearing calculated?
The trouble with gearing is that there isn’t one formula. Accountants, lenders and analysts use at least two:
| Formula | Calculation | Reads as |
|---|---|---|
| Debt to equity | Total debt ÷ equity | Dollars of debt per dollar of owners’ funds |
| Debt to capital | Total debt ÷ (debt + equity) | Share of total funding that is borrowed |
Business.gov.au defines equity as assets minus liabilities, the figure at the bottom of your balance sheet. “Debt” can mean only interest-bearing loans, or every liability including creditors and tax owed, and some versions subtract cash on hand to get net debt. Ask which version is being used before comparing numbers.
Same business, two very different numbers
Take a Newcastle engineering workshop with $600k of loans and equipment finance and $400k of equity.
- Debt to equity: $600k ÷ $400k = 150 per cent
- Debt to capital: $600k ÷ $1m = 60 per cent
Neither number is wrong. But an owner told their gearing is “150” by one adviser and “60” by another could easily think something had changed. If a loan agreement sets a gearing limit, the definitions section spells out exactly which formula and which balance sheet items count, and that’s the one that matters.
Why do lenders care?
Equity is the buffer. If asset values fall or losses mount, the owners’ stake shrinks first, before lenders lose anything. The thinner that buffer, the more exposed each new lender is. That’s why higher gearing tends to bring more questions, extra security requirements, a director’s guarantee or a polite no from the bank.
Larger bank facilities sometimes include a gearing covenant tested each year from your accounts. Breaching it can be a default even if you’ve never missed a repayment, so it’s worth tracking during the year, not just at tax time.
Gearing is only half the picture. In its October 2025 Bulletin, the Reserve Bank pointed out that most insolvent businesses carry little debt, which is a useful reminder that weak cash flow sinks more businesses than borrowing does. Lenders weigh serviceability, whether earnings cover repayments, at least as heavily as the ratio. Curious how the two interact for your business? Our business borrowing power calculator gives a starting point, or ask us directly.
Gearing, leverage and negative gearing
Leverage is essentially the same idea under its American name. Negative gearing is different: it’s a tax term describing an investment, usually rental property, whose costs including interest exceed its income, creating a loss that may be deductible. If you’re buying property through or for a business, talk to your accountant about how any borrowing will be treated, because the tax result and the lender’s view of your gearing are separate questions.
Already carrying debt and need more?
A highly geared balance sheet doesn’t automatically rule out new finance, especially where property security or strong trading can carry the deal. Walk us through it on our form, which most people complete in under a minute without any credit check being run. Your information stays put rather than being shared around the market, and a team member looks over your balance sheet position before ringing you. List your existing loans and leases honestly so the first lender we suggest is one that’s comfortable with your structure.
Frequently asked questions
What is a good gearing ratio for a small business?
It depends heavily on the industry. Asset-heavy businesses such as transport, manufacturing or property can sensibly carry more debt than a service business with few tangible assets. Lenders compare you with similar businesses and care just as much about whether profits cover repayments.
Is gearing the same as leverage?
In everyday use, yes. Gearing is the more common term in Australia and the UK, leverage in the US. Both describe how much of the funding comes from debt.
What is a gearing covenant?
It's a condition in a loan agreement requiring the business to keep its gearing below a stated level, tested from its financial statements. Breaching it can be a default even if every repayment has been made on time.
How does negative gearing relate to business gearing?
Only loosely. Negative gearing is a tax term for an investment, often rental property, where the deductible costs, including interest, exceed the income it produces. Business gearing is a measure of capital structure.
How can I lower my business's gearing?
Retain profits rather than drawing them all out, pay down debt, inject new equity, or convert shareholder loans to equity where your accountant agrees it makes sense. Revaluing assets upwards can also change the ratio, though lenders may adjust for that.