A healthy debt-to-income (DTI) ratio for small businesses is 36% or lower–a threshold cited by many business lenders and financial experts as a sign of manageable debt levels for commercial borrowers. This means less than 36% of your gross monthly income goes toward debt payments—a level that signals to lenders your business is managing debt responsibly.
Why does this matter? Your DTI ratio isn’t just a number. It’s a key metric lenders use to decide whether to approve your loan application, what rates you’ll pay, and how much you can borrow. Keeping your DTI in a healthy range can open doors to better financing, lower costs, and greater flexibility as your business grows.
How to Calculate Your Business Debt-to-Income Ratio
Calculating your business’s DTI is straightforward. Add up all your monthly debt payments—this includes business loans, credit card minimums, lease payments, and any merchant cash advance (MCA) repayments. Next, divide that total by your gross monthly income (your revenue before taxes and deductions). Multiply by 100 to get your DTI as a percentage.
Example: If your business pays $2,000 a month in debts and brings in $8,000 in gross income, your DTI is 25% ($2,000 ÷ $8,000 x 100).
How Does Debt-to-Income Ratio Affect Business Credit?
Your DTI ratio is a major factor in how lenders and creditors view your business. A lower DTI signals financial stability and makes you a stronger candidate for loans and credit lines. On the other hand, a high DTI can limit your borrowing options, raise your interest rates, or even result in loan denials. Lenders want to see that your business generates enough income to comfortably cover its debts.
What’s Considered a Healthy DTI for Small Businesses
Lender guidelines for a healthy debt-to-income ratio can vary, and being in the Caution Zone doesn’t automatically disqualify you from getting a loan. Many businesses with DTI ratios in this range are still approved, though you may face stricter terms or higher rates.
● Healthy DTI: 36% or lower—shows manageable debt and strong financial health.
● Caution Zone: 37%–49%—may indicate financial strain and could limit borrowing options.
● Red Flag: 50% or higher—suggests unsustainable debt and may jeopardize your business’s financial stability.
Lowering Your Debt-to-Income Ratio
If your DTI is higher than you’d like, there are proven ways to lower it:
● Increase your business revenue through sales or new contracts.
● Pay down high-interest debts first.
● Refinance or consolidate loans for better terms.
● Negotiate with lenders for lower payments or interest rates.
Checking Your Business Credit Scores
Your business credit score and DTI ratio go hand in hand. Lenders often check your DTI alongside your business credit profile to assess your financial strength. To monitor your business credit, use platforms like Dun & Bradstreet (DUNS Number), Experian Business, and Equifax Business. These services allow you to track your credit scores, review your credit history, and catch errors that could impact your ability to secure financing.
Debt-to-Income Ratio and Merchant Cash Advance (MCA) Loans
Merchant cash advances can impact your DTI differently than traditional loans. MCA repayments are often higher and more frequent, quickly inflating your DTI and straining cash flow. This can make it difficult to qualify for other types of financing, so it’s important to factor MCAs into your DTI calculation and overall debt strategy.
Methods for Paying Off Debt
Brief explanation of and overview of proven debt payoff strategies:
● Snowball: Pay off your smallest debts first, then roll those payments into the next smallest. This builds momentum and motivation.
● Avalanche: Focus on debts with the highest interest rates first to save more on interest over time.
● Cash Flow Index: Divide each loan balance by its minimum payment; pay off debts with the lowest index to free up cash flow quickly.
● Emotional/Situational: Prioritize debts that cause the most stress, such as those owed to family or with personal significance.Increase your business revenue through sales or new contracts.
Using these strategies can help you reduce your DTI and improve your business’s financial flexibility.
Quick Tips for Improving DTI
You can improve your DTI over time by making strategic adjustments to your finances.
● Review your debt obligations monthly.
● Avoid taking on new debt unless necessary.
● Increase income streams where possible.
● Negotiate better terms with creditors.
● Use accounting software to track debts and payments.
Debt-to-Income Ratios FAQs for Small Business Owners
Q: How does DTI affect the ability to get a loan?
A: A lower DTI helps you qualify for better loans, while a high DTI—especially if you have MCA debt—can lead to higher rates or denial.
Q: How do MCAs impact my DTI ratio?
A: MCA repayments are typically higher and more frequent than traditional loans, which can quickly inflate your DTI and strain cash flow, making it harder to qualify for other financing.
Q: Can I improve my DTI if I’m already using MCAs?
A: Yes. By consolidating debt, negotiating better repayment terms, or increasing revenue, you can lower your DTI and improve your financial outlook.
Q: Will MCA repayments show up on my credit report?
A: Most MCAs do not report to credit bureaus unless you default, but the cash flow impact can indirectly affect your ability to pay other debts, which may harm your credit profile and DTI.
Q: What’s the best way to track DTI if I have multiple MCA loans?
A: Use accounting software or a debt tracking tool to list each MCA separately, including the payment frequency and amount, to ensure your DTI calculation is accurate and up to date.
Q: How Should I Account for Credit Card Debt in My DTI?
A: When calculating DTI, use the minimum required monthly payment for each business credit card, not the full balance. This reflects your actual monthly debt obligation and aligns with how lenders assess your repayment capacity.
Take Control of Your Business Finances with a Healthy DTI
Managing your debt-to-income ratio isn’t just about numbers—it’s about building a business that can weather uncertainty and seize new opportunities. Even if financial details aren’t your strong suit, taking small, consistent steps to understand and improve your DTI can have a lasting impact on your company’s future. Remember, you don’t have to navigate these challenges alone. Seeking guidance from experienced professionals can help you regain control and move your business forward with confidence.