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DEBT-TO-INCOME RATIO

Written by: Ilya Bodner

Article Overview: A small business’s debt-to-income ratio (DIR) is most easily explained as the ratio of a borrower's total debt as a portion of their total gross income. This ratio, more commonly expressed as DIR or simply “debt ratio,” measures how much you can borrow based on your expenses in relation to your total monthly income. Lenders’ experience shows that you may borrow from 33% to 40% of your monthly income, on average.

DEBT-TO-INCOME RATIO

A small business's debt-to-income ratio (DIR) is most easily explained as the ratio of a borrower's total debt as a portion of their total gross income. This ratio, more commonly expressed as DIR or simply "debt ratio," measures how much you can borrow based on your expenses in relation to your total monthly income. Lenders' experience shows that you may borrow from 33% to 40% of your monthly income, on average. To find your small business's DIR, simply divide the total of monthly debt payments to gross monthly income. Typically, the lower your ratio, the better handle you have on debt. Whether you're preparing to apply for small business credit based financing or simply need to know where your small business stands financially, regularly monitoring your DIR is one step towards understanding your financial position. It's a good idea to recalculate your DIR at least once a year, or before any important turning points in the business.

THE REAL RISK OF BORROWING

Collateralizing your car...selling your most valued items...second mortgaging your already overvalued home.... The list goes on and on. Recently, StrongBusinessCredit heard from a musician who sold his equipment to raise more capital for business advertising. What's not right with that picture? Desperate times for business funding leads to outrageous actions.

Perhaps your situation is not as horrific as selling the very equipment that you may rely on to run your business, but tying in any personal items to get through a rough spot is a definite move in the wrong direction. Unsecured personal loans are not tied to any asset; another horror story we hear often. With this type of loan, you are typically going to pay an extremely high interest rate, have a less-than desirable line of credit, and personally guarantee the outcome. Unsecured lines of credit are secured by the most important factor-you! Essentially, by taking out an unsecured line of credit, the business owner is more responsible for the debt than any other lending option.

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Article Tags: business advertising, business funding, business owner, debt payments, debt ratio, debt to income ratio, definite move, desperate times, financial position, gross income, high interest rate, horror story, income lenders, ratio measures, rough spot, small business credit, unsecured line of credit, unsecured lines of credit, unsecured personal loans, wrong direction



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