According to the Small Business Administration, traditional lenders such as bank still make up about 65 percent ($694 billion) of the money loaned to small businesses in 2009. Banks and credit unions are attractive lenders because they are likely able to offer you lower interest rates and fewer strings attached than some of the other sources of credit. They also may be able to point you to some government loan and grant opportunities for your business.

Here’s a few tips for understanding and managing your business debt:

Know your loans

There are a variety of financing options available from banks and other lenders. Understanding the different types is key to choosing the option that’s best for you.

Installment loans are traditional loans that give the lender the full amount when the loan is signed and that are paid back in equal monthly, bi-annually or quarterly payments over time. Some installment loans are adjustable rate loans, which means the interest rates can rise or fall over the life of the loan. With interest rates at historic lows, taking out an adjustable rate loan at this time is a terrible idea.

Balloon loans are loans where the borrower pays back only the interest on an installment basis and then pays back the principal on the loan in one large sum at the end of the loan. These loans are most appropriate when the business must wait until a certain date for payment from a client for its goods or services.

Line of credit loans set a maximum amount the borrower can access at any time. The borrower makes monthly payments on the interest and is free to pay back the principal as he or she sees fit. Most line of credit loans are extended for 12 months and must be renewed at the end of the period. Some lenders require that the line of credit loan be repaid for 7-30 days at the end of each 12 month cycle. These loans are best for businesses that may need temporary access to credit for operating expenses.

When taking out a loan, be sure that you understand all of its terms. Ask questions about fees and repayment terms and be sure that you’re aware of any factors such as adjustable rates or late payment penalties that could increase your payments. Also, if you’re able to secure a Small Business Administration loan, do it. SBA loans have a number of advantages, including lack of a prepayment penalty, meaning that if you pay the loan off early, you won’t have to pay an interest penalty.

Borrowing against the equity in your home

Small business entrepreneurs can use their homes as collateral for financing, however, should the business fail this can result in them losing their homes. Typically you can borrow up to 90 percent of the appraised value of your home, less any outstanding mortgages.  Most lenders’ maximum repayment period for these type loans is 20 years.

A good guideline to keep in mind — Typically, your mortgage payment and home insurance shouldn’t eat up more than 28 percent of your income, while these payments and all other debt shouldn’t account for more than 36 percent of your income.

In addition to your home, you may also be able to take out a small business loan on the cash value of your life insurance policy or on your retirement account. Again, be aware of the risk involved in borrowing against these assets.

Credit cards

Many small and home-based businesses start out with credit card financing. Using a credit card for neccessary start-up capital can be a good option for business owners who can’t get loans or credit elsewhere, but because of the high interest rates involved can carry significant risk for the business owner if the venture does not turn out to be profitable.

If you’re planning on starting a business using your credit cards to fund start-up costs, take a minute to peruse the latest credit card offers you’ve received in the mail. Some credit card companies offer 12 months or more of zero interest when you open up a new credit card account. By taking advantage of these offers and using zero interest cards to fund your start-up (and by quickly repaying the amount borrowed) you may actually get more favorable access to credit than you would have had you gotten a traditional loan.

Before using a credit card to fund your start-up, make sure you understand all the terms of the credit card agreement, including interest, borrowing limits, late fees and penalties to avoid making costly errors. Also be sure to avoid penalties by making at least the minimum payment on time each month.

Making payments

After borrowing money to start up or expand your business, be sure to meet your payment schedule. Missing payments can damage your credit, making it harder for you to secure additional financing. It can also result in penalties and possible default on your loan. If you have multiple loans, be sure to pay off the ones with the highest interest rates first, as this will result in you spending less on your debts over time. Also, you may eventually want to consider consolidating your loans, as this can result in lower interest rates and monthly payments.

Refinancing

Refinancing may help you lower your interest rate and/or your monthly payments on your loan. Once your business is up and running you may be able to get a more competitive rate than what you originally received, particularly if you financed your business through unconventional means such as by credit card debt. Shop banks and credit unions to see if you can get a better rate, but be sure to understand all the terms of a refinance agreement, as there may be hidden charges and fees.

Increasing revenue and cutting costs

If the debt situation at your small business is getting uncomfortable, you need to start looking at ways to improve your cash flow. Look at every item on your budget and look for costs that you can cut. Increase your business’

exposure through aggressive, low-cost marketing such as using social networking and e-mail lists to reach customers.

Debt-to-equity ratio

An important figure for small business owners to know when considering their debt is their debt-to-equity ratio. This ratio is calculated by dividing the business’ equity/net worth by its debt/total liabilities. The ratio gives business owners a good idea how much of their business is owned by the owners and how much is owned by its creditors. Established businesses should seek to maintain a 1 to 1 ratio, as letting the ratio drop below this balance will likely make it more difficult to obtain credit if needed.

Reducing personal liability

When seeking financing small business owners may want to consider the benefits of incorporating or forming an LLC, as it can reduce their personal liability should the business founder. Having corporate or LLC status can help business owners avoid losing many of their personal assets should the business go into bankruptcy or become hard-pressed to make debt payments.

By handling your debt effectively, you can make the most out of your borrowing opportunities to start and expand your business, and avoid the pitfalls associated with high debt.

Your business’ solvency is essentially its ability to pay its bills and meet its obligations. Understanding solvency ratios can help you determine the overall short and long term financial health of your business. Here’s a quick look at the major solvency ratios used by businesses.

Current ratio: Your current ratio is essentially all of your current assets divided by all of your current liabilities. Most businesses will want a ratio of greater than one to one. Your current ratio is most commonly used as a measurement of whether your company is able to pay its debts as they come due. Lenders look at your current ratio to determine whether you’re a good risk to extend credit to on a short-term basis.

Debt to equity ratio: This can be determined by looking at your balance sheet and seeing what the total liabilities are compared to the stockholders equity. This amount represents the total amount of money invested by the owners of the company and the total profit of the business. Businesses with high debt to equity ratios may need to put off capital purchases and focus on lowering their debt.

Debt to assets ratio: The debt to assets ratio assesses what percent of a business’ assets are funded by debt. This number is reached by using the business’ balance sheet. To calculate the ratio, add up all current liabilities and long term debts, then do the same for all of your business’ current assets and net fixed assets. Once that’s done, divide the debt by the assets. The result will be the debt to assets ratio. For example, if your business’ total debt is $200,000, and it’s total assets are $400,000, the business debt to assets ratio is 50 percent, meaning half the company is financed through debt, and the other half is financed through investment or equity.

Quick ratio:  Also known as the “acid test” ratio, this ratio takes the total current assets of your company and subtracts your current inventory and other current assets, such as deposits or prepaid expenses) and then divides the result by the total liabilities. If your quick ratio is less than 1.0, you may be a little too dependent on inventory and deposits and prepaid expenses for short term liquidity.

Day sales outstanding in trade accounts receivable: Basically, this number represents how long it takes for your company to collect on money owed to it by customers. To come up with this figure, divide your trade receivables (money due your business from sales you’ve billed for) by your average daily sales, then multiply that figure by 30. A low number in this calculation is considered good because it means your company is not burning too much capital.

Days costs of good sold outstanding in inventory: This calculation represents how long it takes your company to turn inventory into sales. This figure is reached by dividing your company’s inventory by the average monthly cost of goods sold by your company, and then multiplying the result by 30. Low numbers are good, as they represent that it doesn’t take long for your company to turn inventory into profit.

If you’re concerned about your solvency, there are a number of things you can do to improve the numbers. Obviously, you should try to sell more products or services to reduce some of these ratios, but you should also work to control costs by keeping your inventory closely aligned with your sales. Reducing debt is also important to maintaining solvency.

Key to understanding the solvency of your company is being able to decipher your balance sheet. If you’re not sure how to compile or read a balance sheet, talk to your accountant or a business mentor from your local chamber of commerce or other small business support group. They can quickly give you the tools you need to read and understand balance sheets and use the data in your decision making process.

Solvency measurements are an important tool to help you judge the health of your business, but only offer part of the picture concerning the financial health of your business. To get a fuller picture, you’ll also need to learn about liquidity measurements.