Debt-to-income ratio, or DTI, shows how much of your small business’s monthly earnings repay your existing debt. Essentially you can understand the debt-to-income ratio as monthly debts divided by monthly gross income.
Depending on where this falls as far as your business is concerned, a lender will be able to tell whether or not you’re capable of acquiring any new debt. The lower your DTI, the better your chances are of getting approved for your business loan.
The ideal debt-to-income ratio is anything at or below 35%. 36-49% could be verging on too much debt, though there is still a chance your application would be approved. A DTI above 49% will usually be an automatic rejection as this insinuates that more than half of your current income is being used to pay off existing debts.
The DTI Formula
The formula for calculating your debt-to-income ratio is pretty simple:
DTI = Monthly Debt Payments / Gross Monthly Income
For your monthly debt payments, make sure you account for absolutely everything here. Include any installment debt, credit card payments, mortgage payments, and vehicle payments. Also, don’t forget basic things such as taxes and insurance. All of this goes toward what you spend every single month paying off what is in essence debt.
You do not have to factor in variable expenses such as gas or food. Your gross monthly income is what you earn in a month before any deductions or taxes. Income sources can include bonuses, commissions, investment dividends, and other such revenue.
After you find out your DTI, where does it stand? Let’s say the resulting number is not where it needs to be in order to get a loan for your business. Not to mention, in the long run, a lower DTI is far better for the economic well-being of your organization.
So, how do you lower your business debt-to-income ratio?
Work on paying off existing debt.
Try to pay a little more than the minimum each month. Focus on those credit cards with higher APRs.
Consolidate Debts Where Possible
You might want to consider a debt consolidation loan. This will help you pay down debt faster, your interest rate will most likely be lower, and you’re now looking at one easy monthly payment, versus several scattered payments that are all over the place.
Refinance Current Debts
By renegotiating with a lender, you may be able to get a more favorable rate. Not to mention, this could then knock down your monthly payment as well. And with a lower monthly payment, your DTI is lowered a bit.
Focus on ways to increase sales and bring in more money. You may think about a price increase, launch a new product, run a promotion, and upsell additional services or products. Be creative. The more money you make, the lower your DTI is.
Whether or not you’re a good candidate for a loan is going to depend heavily on your company’s DTI. Lenders who see a low DTI are more willing to take the risk. Carrying too much debt, especially those with high interest, is never a good thing. It can seriously hinder your company’s performance over the long haul. Don’t be overwhelmed by it and do everything you can to manage that debt effectively.
First Union Lending is Here to Help
Here at First Union Lending, we want to see your business grow and we have the funds to help. First Union Lending offers numerous financing programs designed with small businesses in mind. Our business loans are fast and flexible, with financing options ranging from $5,000 to 2 million dollars.
Call today to learn more about our various financing solutions to help your business grow and become successful.