One of the most important parts of assessing your business’s borrowing capacity and financial health is the debt-to-income (DTI) ratio, which measures how much revenue your business earns in a given month compared to how much it spends over the same month on debt-related payments. For example, if your business’s monthly income is $100,000 and you spend $25,000 on debt payments each month, your DTI ratio is 25%.  

Guidance around a healthy DTI ratio for a small business varies. Generally, a lower ratio may improve your chances of qualifying for financing and securing more favorable loan terms and interest rates. However, the ideal ratio also depends on your industry, business model, and the specific requirements of different lenders.

Your business’s DTI ratio is a good indicator of whether or not you’ve taken on too much debt compared to your revenue, and whether you can comfortably manage your existing debt obligations while still being able to fund operations and growth. As such, understanding your DTI ratio is crucial for making informed decisions about when to take on additional debt and how much overall debt your business can handle.

Because revenue and debt payments can vary from month to month, regularly monitoring your business’s DTI ratio is critical to gaining a clear picture of your borrowing capacity over time and making adjustments as needed to prevent financial strain. Accurate, ongoing awareness of your DTI ratio enables you to make informed borrowing decisions. 

For small businesses, it’s not just about knowing how much debt you can afford to take on; it’s also critical to be able to distinguish between healthy debt and risky debt. The difference between these two types of debt largely centers around the terms of a loan and why you're borrowing the money in the first place. 

Healthy debt typically has these characteristics:

Examples of healthy debt include loans for purchasing or upgrading equipment to increase productivity, financing expansion into new markets with proven demand, and acquiring inventory to fulfill existing customer orders.

Risky debt, on the other hand, often involves borrowing at high interest rates, taking on debt to cover everyday operating expenses, or racking up multiple loans without a clear repayment strategy. This type of borrowing can have serious consequences that can undermine your business's stability and future growth potential—and even threaten its ability to continue operating. 

Talking to a banking professional could help clarify specific loan details and help you choose the right path for your business. 

When taken on and deployed wisely, debt might give you access to the capital you need to fund critical purchases, investments, and initiatives while maintaining the cash reserves and financial stability to fund day-to-day operations.

Here are some important overall considerations to keep in mind when optimizing your small business’s approach to debt:

By following these key principles, you could use debt as a powerful strategic asset that fuels your business's long-term success. 

Regular assessment of your financial position, including your debt obligations and repayment capacity, ensures that your borrowing remains aligned with your evolving needs and goals and ultimately helps build a stronger, more competitive business.

Remember that smart borrowing isn't about avoiding debt entirely; it's about using debt wisely to seize opportunities, power growth, build resilience, and help your business succeed over the long term.

Smart borrowing starts with understanding your debt-to-income ratio. Is your business leveraging debt wisely? Take our interactive quiz to assess your financial health and make informed decisions for sustainable growth.

For personalized guidance on smart borrowing for growth strategies, contact a banker today.