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How to Calculate Debt-to-Income Ratio for Your Small Business

By Spodek Law Group | February 20, 2024

How to Calculate Debt-to-Income Ratio for Your Small Business

What is Debt-to-Income Ratio?

A debt-to-income ratio is a percentage calculated by dividing your business’s total monthly debt payments by its total monthly income. This ratio essentially shows what portion of your small business’s income is being used to pay off debts versus covering operating expenses and profits.

For example, if your small business has $5,000 in total monthly debt payments and $10,000 in total monthly income, your DTI would be 50% ($5,000/$10,000). This indicates that half of your business’s income goes toward paying off debts.

Why Calculate DTI for Your Small Business?

  • Assess financial health – Your business’s DTI helps you evaluate if your company is taking on too much debt compared to what it earns. A high DTI over 50% may indicate your business is overleveraged.
  • Qualify for financing – Most lenders will assess your business’s DTI to determine if you qualify for additional financing or credit. A higher DTI may disqualify you.
  • Compare to benchmarks – Your small business’s DTI ratio can be compared to industry benchmarks to see if your company falls within normal ranges or is an outlier.
  • Inform business decisions – Understanding your DTI also helps inform decisions around taking on additional financing, payments to owners, or growth plans.

How to Calculate DTI for Your Small Business

Calculating your small business’s DTI involves a few key steps:

1. Determine Total Monthly Debt Payments

First, make a list adding up all debt payments your business makes each month. This includes payments for:

  • Business loans or lines of credit
  • Equipment or vehicle financing loans
  • Business credit cards
  • Lease payments on equipment, vehicles, or property
  • Accounts payable to suppliers
  • Business taxes
  • Any other debt service

Add all of these up to determine your total monthly debt payments.

2. Calculate Total Monthly Income

Next, determine your business’s total monthly income. This is simply the total sales, revenues, and any other income your business brings in per month.

Make sure to use an average monthly income over a set period, such as the past 3, 6, or 12 months. This smooths out any fluctuations or seasonal changes in your income.

3. Divide Total Debt by Total Income

Now divide your total monthly debt payments by your average total monthly income to calculate your DTI percentage.

For example, if your business has $5,000 in monthly debt payments and average monthly revenues of $10,000, your DTI would be:

Total Monthly Debt Payments = $5,000
Total Monthly Income = $10,000

DTI = Total Monthly Debt Payments/Total Monthly Income
= $5,000/$10,000 = 50%

This shows 50% of your small business’s income goes toward debt payments monthly.

What is a Good DTI for a Small Business?

So what is considered a good or bad DTI ratio for small businesses? Here are some general DTI ratio guidelines:

  • Less than 35% – A DTI under 35% is considered quite healthy and sustainable for most small businesses. This indicates your business likely has capacity to take on more debt if needed to fuel growth.
  • 35-49% – A DTI ratio between 35% and 49% is average for many small businesses. There may be capacity for more debt for expansion needs if managed carefully.
  • 50-69% – DTIs from 50% up to around 70% indicate your small business is significantly leveraged. There is heightened risk, and limited capacity for additional debt without improving profitability.
  • Over 70% – A DTI over 70% is generally considered high risk and financially overextended. Your business may struggle to pay off debts from income, indicating poor financial health.

Tips for Improving Your Small Business’s DTI

If your small business has a high DTI ratio over 50% or 70%, here are some tips to improve it:

  • Increase income – Focus on driving higher sales and revenues to increase your total monthly income. This may organically lower your DTI ratio over time.
  • Pay down high-interest debt – Prioritize paying off debts like credit cards or short-term loans with high interest rates first to quickly reduce debt payments.
  • Renegotiate loan terms – See if you can negotiate extended repayment terms or lower interest rates on existing loans to reduce monthly payments.

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