When running your own business, you are bound to come up against a few challenges that can have an impact on your cash flow, which is where business finance comes in. There is a range of loans that you can choose from to suit your business, whether you’re hoping to grow, train your staff or manage an unprecedented expense. Quick business loans online are making finance more accessible to businesses of all sizes, so you can make your company a success. There are a few factors that can have an impact on your loan approval, debt-to-income ratio is one of them…
What is debt-to-income ratio?
Your debt-to-income ratio is used by lenders to determine how much of a risk you will be when it comes to borrowing money. It is the percentage of your monthly income that goes towards paying monthly debts. The lower your percentage, the more likely you are to be approved for a loan, whether that’s personal or business. This shows lenders that only a small percentage of your income is going to pay debts, which means you will be less of a risk when it comes to taking out a new type of finance. The highest debt-to-income that lenders tend to approve is just over 40%, but this is rare. So, how does your debt-to-income ratio affect your business?
How does it affect your business?
Your DTI shows lenders if you are creditworthy – which means how likely you are to be able to make debt repayments should you decide to apply for finance. Running a business can be challenging, and there will likely come a time when you need help to grow your business, whether that’s with funds to free up cash flow, to buy equipment or train your staff. It is important that you only take out loans that you know you can pay back – if you end up with debt that you are struggling to manage, your business with end up in financial difficulty, and your DTI percentage will rise. A high DTI shows lenders at a glance whether they should lend to you, so keeping on top of your debt and keeping your percentage low is crucial.
How can you improve your debt-to-income ratio?
If you are thinking about applying for finance and your debt-to-income ratio could use some work, here are a few ways in which you can lower your percentage:
- Increase monthly payments: increasing your monthly payments means you can pay your debt off in full more quickly and therefore lower your DTI percentage.
- Avoid large purchases: Making large purchases often means taking out credit to pay for them. If you are hoping to lower your percentage, you should wait until you’ve saved a good amount for a larger deposit, so that the finance payments are less.
- Avoid more debt: Reduce the number of charges on company credit cards so that you can reduce the cost of your monthly bills – doing this will help you to a better position to apply for financial help when you need it.
Types of business loans
So now you know about your debt-to-income ratio and how to improve it so that you can gain financial help when you need it, you’re going to need to have an idea of the types of loans you could choose to help your business. Here are a few that you could choose from:
Term loans: Thesetypes of loans are one of the most common when it comes to business financing and are good for businesses that are looking to expand and grow. They offer funds up front, that you must pay back with interest over an agreed period.
Business lines of credit: This type of business loan is offered as a way of accessing funds up to your credit limit. It is a highly flexible way of lending and means that you only pay interest on the money that you have withdrawn.This type of loan is perfect for businesses that need a short-term financial boost, or if you need help with an emergency expense.
Merchant cash advances: This type of loan is a sum of money up front to help finance your business when you are struggling or having cash flow issues. You make the repayments of this type of loan with a percentage of the credit and debit card sales you make, either weekly or daily depending on the lender you choose.These a great if you need money quickly, and you take a lot of credit card payments within your business.
Benefits of business loans
If you’re still on the fence about whether you should choose to take out finance with a lender, read on and we’ll look at a few of the advantages that come with business loans.
You can spend the money however you like when choosing the best loan for you. Whether you choose a bank loan, small business loan or a term loan, lenders won’t dictate to you what you should and shouldn’t use it for. You can use your loan to help your business grow in whichever way you need, or you can use it to free up cash flow and take the pressure off.
You don’t have to go through a long application and approval process to be able to benefit from a loan, most are accessible online, so you can fill an application in when you have time, and some are even approved on the same day – all you have to do is be as honest as possible and provide all of the information required. Interest rates are also often competitive if your credit score and DTI ratio are healthy, so you will be able to get a good deal with a range of lenders – you just have to choose which is best for you!
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