The short answer. Two ratios tell you. Debt Service should be less than 40 percent of MMP. Fixed Charge Coverage Ratio (EBITDA over all fixed charges including principal and interest) should exceed 1.25. Above both thresholds is safe. Between them is stressed. Below them is dangerous, and one adverse event closes the business.
The 40 Percent MMP Rule
MMP has five sub-layers. Debt Service is one of them, and it competes with Working Capital, Retirement, Owner Comp, and Exit Strategy for the fixed dollar pool of profit above breakeven.
When Debt Service consumes more than 40 percent of MMP, the other four sub-layers are being funded at 60 percent or less of their required level. Most owners in that position underfund Retirement and Exit Strategy first. That works short-term. Long-term, it means the owner is running the business without funding their own future, which is a slow-motion crisis.
The 40 percent rule is diagnostic, not regulatory. Some businesses can operate at 50 percent Debt Service in MMP for a specific reason (recent acquisition being paid off, real estate loan being amortized, one-time equipment investment). The rule sets the warning threshold.
The Fixed Charge Coverage Ratio
FCCR = EBITDA / (Interest + Principal + Rent + Lease Payments).
Some accountants compute it without principal. Do not. Principal is a real cash obligation that comes out of retained profit. Include it in the fixed charges.
Below 1.0, the business does not generate enough operating profit to cover its fixed obligations. That is technical insolvency.
Between 1.0 and 1.25, the business barely covers. Any adverse event (a lost customer, a rate move, a supplier delay) pushes it below 1.0. Stressed.
Above 1.25, the business has meaningful cushion. Adverse events are absorbable.
Above 1.5, the business is genuinely healthy and can service additional debt if needed.
What To Do When Either Ratio Breaks
If Debt Service exceeds 40 percent of MMP but FCCR is above 1.25, the business is over-levered but not insolvent. Fix by accelerating debt paydown from retained earnings or by refinancing to lower rates.
If FCCR is below 1.25 but Debt Service is under 40 percent of MMP, the business is under-earning against its debt load. Fix by repricing to raise EBITDA. If pricing cannot move, cost restructuring or portfolio reshape.
If both ratios break, the business is in danger. Every quarter of continued operation adds to the risk. Options: reprice aggressively, restructure the debt with the largest lender, or consider a bankruptcy consultation before the timing is dictated by an outside event.
This is where the Q1 2026 bankruptcy surge Read lives. Those businesses had both ratios broken for two to four quarters before the tariff trigger arrived.
Frequently Asked Questions
What if my accountant uses different debt coverage ratios?
Ask which ratio they use and whether principal is included. Some accountants use interest-only coverage, which understates the burden. The full ratio includes both principal and interest because both are real cash obligations.
Is a Debt Service to MMP ratio of 30 percent safe?
Usually yes. 30 percent leaves 70 percent of MMP for Working Capital, Retirement, Owner Comp, and Exit Strategy. Assuming Working Capital is stable, that is enough to fund the other three reasonably.
What about SBA 504 real estate loans, do they count differently?
They count. Real estate loans are debt. Include the principal payment in Debt Service and the interest in Fixed Charge Coverage. The long term makes the monthly burden manageable but the total debt shows up in the ratios.
Should I refinance to reduce Debt Service in MMP?
If a refinance genuinely lowers the total interest paid or extends the term appropriately, yes. If the refinance is just moving the payment schedule around without real savings, no. See the refinance explainer for the tests.