| Ways to Improve Your Business’ Debt-to-Income Ratio to Get a Bank Loan

Posted in Business Financing at 9:00 AM by Loftis Consulting

It makes no sense to begin a loan process if going in you don’t know or understand the key metrics lenders use to determine to who they give credit.  The debt-to-income (DTI) ratio is an important metric used by banks and other lenders as one factor in determining your business’ ability to pay monthly debts in order to extend credit.  The formula is as follows:

DTI = Monthly Debt Payments/Monthly Pre-tax Income

Make sure you include the projected monthly debt payment for the needed loan in your calculation.  The lower the DTI result the better; however, it will vary by industry since some businesses have to take on more debt than others in order to operate such as manufacturing companies versus professional service firms.

Once you have determined your DTI, and if it is too high for a lender to give you a loan then you will need to find ways to improve this metric before applying for the loan.  This will take time and discipline.

 

Steps in Improving DTI – Expense Control

  1. Review expenses and cut out any expenses that do not go to the heart of the business and any extras. It may be a sacrifice in the short-term but remember the goal is a loan.
  2. Review expenses and remove any one-time non-recurring expenses. You want the bank to focus on normal day-to-day expenses.  Major one-time costs could negatively impact the calculation.
  3. If you know that there are some major expenses coming up delay them until after the loan process has been completed since any major expenses will unfavorably impact DTI.
  4. Recalculate DTI based on steps 1-3. If not where you need it to be think of ways to improve monthly pre-tax income besides expense control such as improved sales.

 

Steps in Improving DTI – Improve Sales

  1. Review length of time it takes to sell inventory. If it is over your industry average look for ways to move it faster. For super old inventory put it on sale to improve short-term cash flow.
  2. Perform data analytics on customer base in order to target sales better. Loftis Consulting can help analyze your sales data for improved results.
  3. Get rid of slow moving product and increase amounts available to sell for products that sell easily.

 

Steps in Improving DTI – Other Tips

  1. Lower the loan amount requested if possible. This way you meet the DTI guidelines and if the loan investment will improve sales or make your operations more efficient you can get a future loan as the savings or increases sales are realized.
  2. Shop around for a bank that caters to your industry. An industry-specific banker will likely have more flexibility on the DTI requirement since they understand your business. Most banks want a DTI no higher than 36%.

Need help getting your financials in shape for a loan submission or need assistance with expense management and increasing profits, call Loftis Consulting today for the CFO Services.

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