Why lenders look at DTI for small business loans

Lenders use the debt-to-income ratio (DTI) as a quick, standardized way to gauge repayment capacity. For small-business lending, many underwriters review both:

  • Personal DTI: the borrower-owner’s monthly personal debts divided by gross personal income. This matters especially when an owner personally guarantees a loan.
  • Business cash-flow measures: commonly the debt-service coverage ratio (DSCR), which compares business net operating income to business debt payments.

A strong DTI improves the odds of loan approval and can affect pricing (interest rate) and required collateral. The Consumer Financial Protection Bureau outlines common consumer lending practices that influence how lenders weigh debt and income; while small business underwriting can differ, many principles overlap (Consumer Financial Protection Bureau).

How to calculate DTI (step‑by‑step)

  1. Add up recurring monthly debt payments you are contractually obliged to pay. Include: mortgages, auto loans, student loans, minimum credit card payments, personal loans, alimony/child support, and any existing debt-service on business loans you personally guarantee.
  2. Use gross monthly income (before taxes and payroll deductions). For owners with variable income, lenders may average the last 12–24 months of earnings from tax returns or use a conservative monthly run-rate.
  3. Divide total monthly debt by gross monthly income and multiply by 100 to get a percentage.

Example (personal DTI):

  • Monthly debts: mortgage $1,200 + auto $350 + credit cards (min) $200 + student loan $150 = $1,900
  • Gross monthly income: $6,000
  • DTI = (1,900 / 6,000) × 100 = 31.7%

Note: For many small-business loans, underwriters will also request business profit-and-loss (P&L) statements and tax returns to compute a DSCR. DSCR and DTI together give a fuller picture of risk.

How lenders treat different income and debt types

  • Income: Lenders vary in whether they accept gross receipts, owner’s draw, or taxable income. Sole proprietors and pass‑through owners commonly present Schedule C or K‑1 figures from tax returns; lenders often average multiple years and may add back non‑cash items (e.g., depreciation).
  • Debt: Some lenders count the full monthly payment for all business loans; others only count payments the borrower personally guarantees. Leases, merchant cash-advance payments, and certain vendor contracts may also be included.

Because practices vary, always ask the lender how they calculate DTI and which documents they’ll use. For SBA-guaranteed loans, the SBA and participating lenders will look at both personal financials and business projections—see SBA guidance for small-business lending (SBA.gov).

Typical thresholds and what they mean

There’s no single nationwide cutoff for small-business lending, but common reference points include:

  • Consumer lending benchmark: around 36% is commonly cited for personal DTI in consumer mortgage underwriting.
  • Small-business lending: acceptable DTI can range widely. Some lenders will consider personal DTI up to 45–50% if the borrower shows strong business cash flow or collateral.
  • SBA loans: underwriters place greater emphasis on both personal credit and business cash flow; personal DTI alone rarely determines eligibility.

Higher DTI doesn’t automatically mean denial. Lenders balance DTI with credit history, collateral, business revenue trends, and the purpose of the loan.

Practical examples for small business borrowers

Example 1 — Owner with low personal DTI and growing business:

  • Personal monthly debts: $900
  • Personal gross monthly income: $5,000 → personal DTI = 18%
  • Business net cash flow easily covers projected loan payments, DSCR > 1.5

Outcome: Favorable terms likely; lender treats business as primary repayment source and personal DTI supports a guarantee.

Example 2 — Owner with high personal DTI but improving business:

  • Personal monthly debts: $2,500
  • Personal gross monthly income: $6,000 → personal DTI = 41.7%
  • Business DSCR near 1.0 but expected to climb after equipment purchase

Outcome: Lender may require larger down payment, higher rate, or a co-signer. Showing a plan to reduce personal debts or interim cash flow forecasts can help.

Steps to improve your DTI before applying

  • Reduce monthly debt payments: refinance high‑rate debt, negotiate lower payments, or consolidate to a lower monthly obligation.
  • Increase documented income: formalize salary or owner’s draw, keep consistent bookkeeping, and provide two years of tax returns when possible.
  • Pay down small revolving balances: even modest reductions in minimum payments can materially improve DTI.
  • Remove non‑recourse personal obligations from your credit profile where possible (e.g., pay off cosigned private loans).

In my practice working with over 500 small-business clients, the fastest wins usually come from reducing credit-card balances and restructuring a single large payment into a longer term at a lower monthly cost.

Documents lenders commonly request

  • Personal tax returns (2 years typical)
  • Business tax returns and profit & loss statements (12–24 months)
  • Business bank statements (3–12 months)
  • Personal financial statement (assets, liabilities, monthly obligations)
  • Credit reports and authorization to review credit history

Preparing these in advance shortens underwriting and avoids surprises about which debts lenders count.

When DTI is less important: the role of DSCR and collateral

For many commercial loans, especially for established businesses, lenders focus more on DSCR (net operating income ÷ debt service). A DSCR above 1.25–1.5 is often viewed favorably. That means the business produces 25–50% more cash than required to cover debt service.

If your business cash flow is strong, lenders may accept a higher personal DTI or request the owner provide additional collateral or a guaranty.

Common misconceptions

  • “DTI only uses personal debts”: False. Lenders may include business debts if you personally guarantee them or if the application requires consolidated obligations.
  • “One DTI threshold applies everywhere”: False. Thresholds vary by lender, loan program, and the borrower’s full financial picture.
  • “A slightly high DTI is automatic denial”: False. Many lenders weigh it with credit quality, collateral, loan purpose, and business projections.

Action checklist before applying for a business loan

  1. Ask potential lenders how they calculate DTI and whether they require DSCR analysis.
  2. Gather two years of personal and business tax returns and recent P&L statements.
  3. Reduce revolving balances where possible to lower minimum payments.
  4. Consider a co-borrower or guarantor to strengthen the application if personal DTI is high.
  5. Compare offers; different lenders treat income and debts differently.

Further reading and internal resources

Sources and notes

Professional disclaimer: This article is educational only and does not constitute personalized financial, tax, or legal advice. Consult a certified financial planner, CPA, or SBA-approved lender for guidance tailored to your situation.

In my experience advising small-business owners, a clear, documented plan to lower DTI and improve business cash flow often unlocks better loan terms. Focus on the numbers, gather the right documents, and discuss calculation methods with prospective lenders before applying.