Debt-to-Income Ratio: The Prime Determinant of Your Business Loan Application
The debt-to-income ratio of your business is one of the most important determiners of whether your business is the right applicant for a small Business Loan program or not. We weed out the jargon and explain the importance of the debt-to-income ratio. Read on to know exactly what it is and how to calculate it to avail a Business Loan.
To take a small business from a startup to bigger, more stable enterprise, entrepreneurs like you often need a Business Loan. This loan may be used for hiring the right manpower, fulfilling expansion needs like a bigger working space, getting the right delivery infrastructure, investing in machinery or raw materials or any other business requirements. If you are ready to apply for a loan, begin by considering the profitability of your business.
What do You Need to Get a Business Loan ?
In order to get a Business Loan to fuel your startup, you will need to consider business loan eligibility criteria and essential documents.
Here are the customer profiles who are eligible for Business Loans:
- Self-employed professionals (like architects, doctors, chartered accounts, etc.)
- Self-employed non-professionals (like traders and manufacturers)
- Entities (like Partnerships, Limited Liability Partnerships, Private Limited companies and closely held Limited companies)
The common documents required span from those showcasing your income details (such as IT returns), bank account statements, business proof, etc.
Also Read: Business Loans: A Beginner’s Guide
One of the most important things to consider when applying for a Business Loan is the debt-to-income ratio. Lenders often look at this number before sanctioning a Business Loan, and you too should keep it in mind before you apply for the right loan for your business.
What is It?
Simply put, debt-to-income ratio is the way that lenders gauge the entrepreneur or business owner’s ability to repay the Business Loan and successfully handle monthly payments. It is expressed as a percentage, and calculated as under:
Total recurring monthly debt payments divided by the gross monthly business receipts or income.
The monthly business debt includes all monthly payments that the business needs to make towards other borrowings or debts undertaken in the past that are still due. The monthly receipts include all gross monthly income that is received into the business. This income includes earnings as well as interest and other monthly receipts from investments made in the past.
Why is It Important?
The debt-to-income ratio is important in order to determine the amount of surplus cash the business generates, which can be used to repay any additional debt that the business raises—including your new Business Loan. Apart from being profitable, lenders also find it necessary to determine whether the business has the monthly cash flow to make timely payments for additional debt of the Business Loan that is being acquired by you.
When is It Important?
The debt-to-income ratio is important when lenders like Bajaj Finserv look at your Business Loan application. It helps the lender ensure that your business generates the income each month to be able to easily repay the additional Business Loan. The debt-to-income ratio is the key ingredient in the decision to advance a Business Loan apart from other factors, which include profitability, collateral and credit history.
Consider Bajaj Finserv for all your Business Loan requirements, since it offers easy online application, fast processing, comfortable repayment options and low interest. Along with your properly filled-out Business Loan application, make sure to ensure that your business’ debt-to-interest ratio is favourable for fast loan processing.