Debt to Income Ratio- The deciding factor for the business loan
In business loan, the lenders use several tools to analyze your financial condition. You are aware of the credit score and also know that it plays a major role in the loan process, more the credit score less will be the interest rate. But alone the credit score is not sufficient to avail the loan. The other deciding factor for the business loan is the ‘Debt-to-Income’ Ratio. Now here, you will get to know about the features and the application of the Debt to Income Ratio and how it is related to the business loan. Improve Credit Score to avail business loan easily
What is Debt to Income Ratio?
Debt to Income ratio is a fraction of your monthly debt to the monthly income. This ratio enables the lender to judge your financial health and it also acts as a qualifying factor in the business loan, means if you are not in the risky zone then the lender will offer the loan.
How Debt to Income Ratio is important?
This ratio will help you to figure out your existing debt and through the same, you can think for the future loan. If you stand in a good zone, then this ratio will help you to know how much more money you can take from the lender in the form of a loan. However, if you are in a dead zone then it is recommended to avoid further loan as it can create a severe impact on your credit score.
- If we talk from the side of the lender, then DTI plays a significant role and they will calculate your debt potential and how much you can pay against the loan.
- If the debt to income ratio is good, then the probability of getting the loan is higher.
- DTI helps you to get the business loan at a low-interest rate.
- It helps you to take multiple loans.
- It reduces the repay stress as the ratio indicates your healthy financial condition if the same is in good figure.
- For a small business, the lenders usually look for the small business’s debt coverage ratio and the owner’s debt to income ratio, both plays a crucial factor amid the processing of the loan. DTI shows the trustworthiness and your capacity to run the business and if in case you don’t have any collateral, then DTI will help you to avail the business loan.
Calculate Debt to Income Ratio
As stated earlier, it is the fraction of your monthly debt to your monthly income. So, while calculating you just need a simple formula and the same is provided below.
Debt to Income Ratio = Total of Monthly Debt Payments / Gross Monthly Income
But before moving to the calculation part, you must figure out your monthly debt and monthly income. The former includes all your recurring debt occurred in a month which includes small business debt, and other loans you have taken from the lenders. The latter includes your monthly income from the business excluding tax. Now keep these figures ready and divide them to get your Debt to Income ratio.
After calculating DTI, you may wonder about the result, means whether you lie in the good zone or risky zone. So, no need to get worried as here you will find a slab which will help you to determine your financial condition as per the calculated DTI.
Are you in a dead zone? Find out here
The slab of DTI varies as per the lender but the average of the same is 36%. In short, if your DTI is less than 36%, then you are in a comfort zone and can easily get the business loan. However, some lenders also offer the loan at 40%. But if your ratio is higher than 40% then chances of getting a loan will be lesser.
So, before moving to the lenders you will have to perform some research activity to choose the lender because of the variation in the DTI.
However, if you are in a risky zone and need to repair your DTI then follow the few steps listed beneath. This will help you to make your DTI in a good position, so that you can avail the business loan in an efficient manner.
How to improve Debt to Income Ratio?
- Well, the first factor is the income and you must focus to increase your business income as more the revenue, less will be the debt.
- It is always recommended to clear the dues and if possible, do the same on time and this will minimize your debt and will build your Debt to Income ratio.
- If you have higher debt, then try to avoid for the further loan from the lenders. First, clear all the dues and then focus on your business model wisely so that you can earn more profit.
Where to move if the Debt to Income Ratio is higher?
If Debt to Income ratio is very higher and you fail to get the business loan from the lender, then don’t get annoyed as the business cash advance company is with you and they will offer the business loan. These companies look for other factors and mostly overlook your debt history. They focus on your collateral capacity and the dues payment. If these factors are good, then you can easily avail the loan from such companies.
The best part of these companies is the processing time, the entire application process takes only 15 minutes and within an hour you will get to know whether you are getting a business loan or not. But most likely if the deciding factors are in favorable condition, then you will get the loan in a quick span of time.
Debt is the base of the business and it can’t be ruled out. But, to manage the same is the difficult process and here you will have to focus more so that you can repair your Debt to Income ratio to avail the business loan from the traditional bank at the lowest interest rate.