Self-funding ratio: How to calculate your self-financing capacity

Is your business financially viable and self-sufficient? The self-funding ratio can help you find the answer. This key metric reveals how much your business depends on its own resources versus external debt. And it’s a vital indicator of your company's long-term stability and resilience.

Imagine this: You’re gearing up to expand, take on a big client, or launch a new market. But when you approach the bank for funding, you’re turned down. Why? Your self-funding ratio suggests that you're not a good candidate for a loan.

In this article, we’ll break down:

• What the self-funding ratio is
• Why it matters for your business’s health
• How to calculate it, and
• Practical tips to improve it and keep your business on solid financial ground

Next time you need funding, you'll have the financial insights to get the best terms and the full amount.

What is the self-funding ratio?

The self-funding ratio measures how much of your financing comes from your own equity versus outside debt. Essentially, it’s about self-reliance.

A high self-funding ratio means your business has enough liquidity to cover debts and fund new projects without leaning too hard on the bank. It’s a sign of financial stability and a business that can handle unexpected challenges or economic downturns.

Example:
Let’s say your business has €80,000 in equity and a total balance sheet of €120,000. Your self-funding ratio is:
(80,000 / 120,000) × 100 = 66%.

This shows you’re in a strong financial position and have the kind of stability banks like to see when considering loan requests.

Why is the self-funding ratio so important?

1. It keeps your business stable

A high self-funding ratio shows that your business is resilient and can weather financial storms.

For instance, a business with a 60% ratio is much better equipped to handle a sales slump than one with only 20%. It also gives you the freedom to make strategic moves—whether it’s hiring top talent, investing in new projects, or upgrading equipment—without constant financial stress.

Plus, it gives you room to seize growth opportunities without worrying about unexpected financial setbacks.

2. It builds trust with banks and investors

Investors and lenders prefer businesses that manage their finances responsibly. A solid self-funding ratio sends the right signals—it shows you’re in control of your debt and capable of paying it back.

Planning to raise funds or bring in new investors? A strong self-funding ratio works in your favor. It highlights your ability to generate profits and handle financial commitments, making you an attractive partner for long-term collaboration.

3. It reduces the risk of insolvency

The less dependent you are on debt, the lower your chances of running into trouble when times get tough.

For example, during the COVID-19 crisis, businesses with heavy debt loads struggled to stay afloat when revenue streams dried up. But companies with strong self-funding ratios were better positioned to ride out the storm.

Low debt means fewer interest payments and more financial flexibility, which is crucial when the unexpected happens.

How to calculate the self-funding ratio?

Here’s the formula:

Self-funding ratio = (Equity / Total Balance Sheet) × 100

What’s included in equity?

Equity is made up of:

• Share capital (funds from partners or shareholders),
• Reserves (retained earnings),
• Net profit, and
• Shareholder current account contributions.

Equity reflects your business’s net worth after subtracting all liabilities. It’s a key indicator of financial health and your ability to absorb potential losses.

What’s included in the total balance sheet?

The total balance sheet covers everything your business owns—cash, inventory, equipment, receivables, and more.

It includes:

• Current assets like inventory and receivables,
• Fixed assets like machinery and buildings.

This gives a full picture of your company's financial resources.

Example calculation

If your business has €300,000 in equity and a total balance sheet of €500,000, here’s the math:

(300,000 / 500,000) × 100 = 60%.

That means 60% of your resources come from your own funds—a solid position to be in.

What’s a good self-funding ratio?

It depends on your industry:

• Manufacturing: With heavy investments in equipment, a healthy ratio is around 40–50%.
• Services: With fewer fixed assets, aim for 60% or higher.
• Tech and startups: Early-stage businesses often start lower (20–30%) but should improve over time as profits grow and new investors come in.

The key is to compare your self-funding ratio to industry standards to see how you stack up.

How to improve your self-funding ratio

1. Increase your equity

• Reinvest profits instead of paying them out as dividends.
• Raise share capital by bringing in additional contributions from partners or shareholders.
• Attract external investors to boost your equity base.

2. Reduce your debt

• Focus on paying down short-term loans first to lower your liabilities.
• Renegotiate with creditors for better repayment terms.
• Avoid taking on new debt unless it’s absolutely necessary.

3. Optimize your costs

• Identify and cut unnecessary expenses.
• Improve your margins by increasing prices (if the market allows) or cutting production costs.
• Streamline internal processes to improve efficiency and profitability.

What if your self-funding ratio is negative?

A negative self-funding ratio can be alarming, but it’s not the end of the road. At Defacto, we offer fast and flexible financing solutions to help businesses get back on track.

Whether you need cash to cover payment delays, finance a large order, or restructure your debt, we make accessing funds simple and transparent.

With Defacto, you can quickly restore your financial stability and focus on growing your business.

Take action today

Your self-funding ratio is a key indicator of your business’s resilience. By keeping it healthy, you’ll be better positioned to weather challenges and seize opportunities.