How much debt should I take to grow?
This week on Catapult your Business, we help catapult business owners one question at a time. We have an excellent guest, Jared Kohlmann, Founder of Pro Photo Rental, Inc. Jared asks, “What is a standard/appropriate debt-to-income ratio for a company like ours that is so asset-heavy? How do we decide if taking on more debt is worthwhile to serve more clients?” In this episode, we slow down to look at standard practices, how to identify your debt-to-income ratio and how to look at your cash flow so that you can look ahead to make better decisions for your business.
What Is Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) compares how much money you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes towards rent, mortgage, credit cards, or other debt payments.
How to Calculate Your Debt-to-Income Ratio.
To find your DTI, you need the amount it costs each month to service the debt (How much in principle and interest you have to pay) DIVIDED by income.
What Is a Good Debt-to-Income Ratio for your business?
Your small business DTI ratio should be below 50% if you want to be considered for a loan. This means that less than half of your profits are being used to repay debt. To maximize your chances of loan acceptance, aim for a DTI ratio of 36% or less—the lower, the better.
Cash Flow Performa
To understand your DTI and how it will change, you need to build a Cash Flow Performa for future financial trending and forecasting.