The Debt-to-Income (DTI) ratio is a percentage that shows how much of your business’s monthly income goes toward paying debts. It’s a key metric lenders use to decide if your business can handle more debt. Here’s what you need to know:
- Formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100 - Example:
If your business has $3,000 in monthly debt payments and $10,000 in income, your DTI is 30%. - Why It Matters:
A lower DTI (ideally 36% or less) makes you more attractive to lenders and can lead to better loan terms. A higher DTI may signal financial risk. - How to Improve DTI:
- Reduce debt by consolidating loans or paying off high-interest debts.
- Increase income through strategies like upselling, recurring revenue streams, or targeting high-value customers.
Lenders typically prefer a DTI of 36% or lower, but businesses with strong cash flow or collateral may still qualify with higher ratios. Tools like TermLoans offer flexible financing even for businesses with high DTI.
Knowing your DTI helps you make smarter financial decisions and improve your chances of loan approval.
How Lenders Evaluate DTI in Loan Applications
When you’re applying for business financing, lenders take a close look at your Debt-to-Income (DTI) ratio along with other factors like your credit score, cash flow, and overall financial health. While a strong credit score and steady cash flow can sometimes balance out a higher DTI, the ratio remains a key metric in determining your repayment ability.
Most lenders aim for a DTI of 36% or lower, but some are willing to approve applications with ratios as high as 43% in certain cases. Here’s a closer look at industry standards and situations where higher DTI ratios might still work in your favor.
DTI Requirements by Industry
DTI expectations can vary significantly depending on the industry. While a DTI below 50% might be acceptable, keeping it at or below 36% can greatly increase your chances of approval. Industries with seasonal revenue fluctuations or irregular cash flow patterns often come with adjusted lender expectations, but a lower DTI is always a safer bet.
When Lenders Accept Higher DTI Ratios
If your DTI ratio is higher than the ideal range, don’t lose hope. Lenders often consider the broader financial picture. For instance, a business with strong cash flow, a solid credit history, and reliable collateral can still secure financing, even with a higher DTI.
"From our perspective, we want to know the character of our borrower. We work with great people, and we want to take the time to get to know them and make sure we understand who they are."
- Rob Roach, Oak Street Funding‘s director of underwriting
Lenders typically review essential financial documents, such as income statements and balance sheets, and may ask for additional records like tax returns or pro-forma financials. Keeping your financial records accurate and addressing any credit issues can significantly improve your chances of approval.
TermLoans recognizes that businesses sometimes need financing even when their DTI ratios aren’t ideal. By taking a personalized approach, they assess your entire financial situation – not just the DTI ratio – to offer financing solutions tailored to your business needs. This comprehensive evaluation ensures that businesses have access to the funding they require, even in challenging circumstances.
How to Calculate Your Business DTI Ratio
Getting your business’s debt-to-income (DTI) ratio right can strengthen your loan application by clearly outlining your financial obligations. While the formula itself is simple, accuracy depends on paying close attention to the details and knowing which numbers to include.
DTI Calculation Steps and Formula
The formula for calculating DTI is straightforward: DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100. This percentage shows how much of your income is used to cover debt payments.
Here’s how to break it down:
- Total Monthly Debt Payments: Add up all recurring debt obligations. This includes things like mortgages, car loans, credit card minimum payments, and installment loans. Be sure to exclude non-debt expenses, such as rent or utility bills.
- Gross Monthly Income: Use your business’s monthly revenue before subtracting expenses like the cost of goods sold (COGS).
Here are two examples to illustrate:
- A manufacturing business with $50,000 in gross monthly income and $10,500 in monthly debt payments calculates its DTI as: ($10,500 ÷ $50,000) × 100 = 21%.
- A consulting firm earning $7,000 per month with $1,500 in current debt payments has a DTI of 21.4%. If they take on a new loan adding $300 to their monthly payments, their DTI rises to 25.7%.
After running the numbers, it’s important to double-check your calculations and avoid common errors.
Mistakes to Avoid When Calculating DTI
- Mixing up what counts as debt: Don’t include operating costs like rent or utilities, as these are not considered debt.
- Using net income instead of gross income: Lenders focus on your gross income – your earnings before taxes and deductions – for a more accurate picture of your financial capacity.
- Ignoring seasonal income fluctuations: If your business income varies throughout the year, relying on just one month’s figures can skew the results. Instead, average income over several months or use quarterly data.
- Leaving out debt obligations: Make sure to include all recurring debts, even short-term ones, to get a complete view of your financial commitments.
- Not planning for future expenses: Anticipate upcoming debts or seasonal spikes in costs to avoid surprises during the loan approval process.
- Relying only on DTI: While DTI is a key metric, it’s not the whole story. Pair it with other indicators like cash flow trends, debt service coverage ratios, and overall business stability to get a fuller picture of financial health.
Ways to Lower Your Business DTI Ratio
Lowering your business debt-to-income (DTI) ratio comes down to two key actions: reducing your monthly debt obligations or increasing your gross income. Both strategies can improve your financial standing, giving you better access to financing and more favorable loan terms.
Paying Down Business Debt
Tackling business debt starts with smart strategies like consolidation, refinancing, and structured repayment plans. Debt consolidation merges multiple loans into one with improved terms, while refinancing can help you secure a lower interest rate on existing loans. You might also consider repayment strategies like the debt snowball method, which targets smaller debts first for quick wins, or the debt avalanche method, which focuses on paying off high-interest debts to save money over time.
Another option? Open communication with creditors. As Barry Coleman from the National Foundation for Credit Counseling explains:
"Creditors are often willing to work with borrowers who are in a bind, especially when those borrowers communicate early".
Start by organizing all your debts – list out balances, interest rates, payment amounts, and due dates. This clear overview will help you prioritize repayment and spot opportunities for consolidation. To free up funds, cut back on non-essential expenses and redirect that money toward paying down debt.
If managing debt feels overwhelming, consider consulting a financial advisor or credit counselor. These professionals can provide customized debt management plans and strategies. While reducing debt is crucial, pairing it with income growth can make an even bigger impact on your DTI ratio.
Growing Your Business Income
Boosting your income is the other side of the equation. Start by focusing on your most profitable customers – those who bring the highest return on investment. Strengthen these relationships to encourage repeat business and long-term loyalty. You can also refine your pricing strategy by analyzing your market position and competitor pricing to ensure you’re maximizing profit margins.
Recurring revenue streams, like subscription models, can create steady cash flow and reduce financial uncertainty. Additionally, consider upselling complementary products or services to increase the average spend per customer. Offering flexible payment options, such as installment plans, can also make higher-priced items more accessible and drive sales.
As Indeed.com highlights:
"Increasing sales and revenue is a high priority for most companies. Focusing on your customers and how they respond to different sales and marketing strategies can help you decide how best to increase sales and revenue".
Track your progress regularly. Even small gains in revenue or reductions in debt can significantly improve your DTI ratio. A stronger DTI not only enhances your borrowing power but also puts you in a better position to negotiate favorable loan terms.
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TermLoans Business Financing Options
When your business is grappling with high debt-to-income (DTI) ratios, finding a financing partner that offers flexible solutions can be a game-changer. That’s where TermLoans steps in, providing funding options that go beyond the usual DTI requirements.
TermLoans Product Overview
TermLoans offers four primary financing products, each tailored to address specific business needs:
- Business Term Loans: Structured loans of up to $5 million with competitive rates and customized terms, perfect for funding investments or expansion projects.
- Business Lines of Credit: A revolving credit option that lets you access funds as needed, with interest charged only on the amount you use.
- SBA Loans: Government-backed loans that feature low-interest rates and extended repayment terms, designed to align with SBA guidelines.
- 0% Interest Bank Financing: For qualifying businesses, this option provides capital without accruing interest, making it an attractive choice for short-term needs.
All these products come with an easy online application process, quick pre-approval, and a complimentary financial analysis to ensure the right fit for your business. More importantly, TermLoans takes a tailored approach when working with businesses facing high DTI challenges.
How TermLoans Works with High DTI Businesses
For businesses with high DTI ratios, TermLoans takes a more personalized approach. Instead of automatically denying applications based solely on DTI, the company evaluates the broader financial picture, offering flexibility that traditional lenders often lack.
One key feature is repayment terms designed to align with your cash flow. If your business experiences seasonal revenue fluctuations or irregular income cycles, TermLoans can customize payment schedules to match those patterns. This approach helps you manage existing debt while still accessing the capital needed for growth.
TermLoans also considers businesses with less-than-perfect credit histories. They look beyond DTI and assess factors like revenue trends, the overall outlook for your industry, and the fundamentals of your business. This holistic evaluation opens doors for companies that might otherwise struggle to secure funding through conventional channels.
Additionally, TermLoans’ financing can help improve your DTI ratio over time. By using funds strategically – whether to boost revenue or consolidate high-interest debt – you can strengthen your financial standing. TermLoans isn’t just about providing funding today; it’s about helping businesses lay the groundwork for long-term financial health and growth.
Conclusion
Keeping your Debt-to-Income (DTI) ratio in check is key to securing financing and maintaining long-term financial stability. Financial experts often suggest maintaining a low DTI ratio to improve your chances of funding approval. A clear understanding of your financial standing can open doors to financing solutions tailored to your needs.
By regularly reviewing and improving your DTI, you can strengthen your financial foundation. Strategies like increasing your gross income and cutting unnecessary expenses can lower your DTI, making you more attractive to lenders while improving cash flow.
For businesses dealing with high DTI ratios, TermLoans offers a personalized approach to financing. Their flexible repayment options and comprehensive evaluation process go beyond just the numbers, helping you secure the capital you need. Whether it’s through Business Term Loans, Lines of Credit, SBA Loans, or 0% Interest Bank Financing, having the right financing partner can turn DTI-related challenges into opportunities for growth.
Taking steps to optimize your DTI today can set the stage for a stronger and more secure financial future.
FAQs
What are the best ways to lower my business’s Debt-to-Income (DTI) ratio to improve loan approval chances?
Lowering your business’s Debt-to-Income (DTI) ratio can play a key role in improving your chances of securing a loan. Here are a few practical ways to make that happen:
- Reduce existing debts: Focus on paying off high-interest debts first, or consider consolidating loans to decrease your monthly obligations.
- Boost business income: Look for ways to increase revenue – whether it’s through higher sales, introducing new income streams, or fine-tuning pricing and operational efficiency.
- Reassess loan amounts: Opting for a smaller loan can help improve your DTI ratio, making your application more appealing to lenders.
Also, make sure your financial records are accurate and up-to-date. Lenders will scrutinize these closely during the approval process. A healthier DTI ratio not only enhances your loan eligibility but also reflects positively on your business’s overall financial stability.
What do lenders look at if my business has a high debt-to-income (DTI) ratio?
When your business has a higher-than-ideal debt-to-income (DTI) ratio, lenders dig into several aspects of your financial situation before deciding on your loan eligibility. They’ll evaluate your business’s cash flow, credit score, and revenue stability to get a clearer picture of your financial health. If you have strong cash flow, it can work in your favor by demonstrating your ability to manage existing debt while taking on new obligations.
Lenders also take into account the nature of your debt – whether it’s fixed or variable – and the specific risks tied to your industry. On top of that, they’ll likely review your business’s operational track record and whether you can offer collateral to secure the loan. By examining these factors, lenders gauge whether your business is a solid candidate for financing, even with a higher DTI ratio.
How does my industry affect the acceptable debt-to-income (DTI) ratio for a business loan?
How Your Industry Affects Debt-to-Income (DTI) Ratios for Business Loans
Your industry can heavily influence what’s considered an acceptable debt-to-income (DTI) ratio when applying for a business loan. While a DTI ratio of 36% or less is often seen as a healthy benchmark, this number can vary depending on the financial dynamics of your specific sector.
Take industries like hospitality or retail, for instance. These sectors often deal with unpredictable revenue streams, which can lead lenders to impose stricter DTI requirements due to the higher risk involved. On the flip side, businesses operating in more stable industries may find that lenders are more lenient with their DTI thresholds. Beyond the industry itself, lenders also evaluate factors like your cash flow and overall debt management, which can differ significantly from one business to another.
Knowing how your industry shapes DTI expectations is key to preparing for the loan application process. If you’re unsure about your current DTI or need funding tailored to your business’s unique circumstances, TermLoans provides financing solutions designed to support businesses across a wide range of industries.