A business debt-to-income ratio compares the payments a business already owes with the money it brings in. This Lodgeleaf Business Loans walk-through for Lexington, KY owners shows how to calculate debt-to-income and debt service coverage, works a hypothetical example, and explains why no single 'good' figure applies. Funding partners set their own standards.
Two ratios partners read
Partners look at existing debt in two common ways. A debt-to-income ratio compares monthly debt payments with monthly revenue or income. A debt service coverage ratio (DSCR) compares the cash the business generates with the debt payments it must make. Both answer the same question: how much room is left for a new payment?
How to calculate a business debt-to-income ratio
Add up every monthly payment on business debt: loans, equipment financing, lines of credit, leases and any merchant cash advance collections. Divide by monthly revenue (some partners use monthly net income instead). Multiply by 100 for a percentage.
Hypothetical example: a Lexington, KY cafe pays $3,000 a month on an equipment loan, $1,200 on a lease and $800 on a line of credit, $5,000 in total. Monthly revenue averages $50,000. Its debt-to-income ratio is 5,000 divided by 50,000, or 10% of revenue.
How to calculate debt service coverage ratio for a small business
Take the business's net operating income for a period, which is revenue minus operating costs before debt payments, and divide by total debt payments for the same period. A ratio above 1.0 means the business earns more than its debt payments; below 1.0 means it does not.
Continuing the hypothetical cafe: if its operating costs, excluding debt payments, are $43,000 a month, net operating income is $7,000. DSCR is 7,000 divided by 5,000, or 1.4. Adding a new $1,500 monthly payment would bring it to 7,000 divided by 6,500, about 1.08.
Test what a new payment might be with the loan payment calculator, then rerun the ratio with it included.
What is a good debt-to-income ratio for a business?
There is no single answer, and Lodgeleaf does not quote one, because each funding partner sets its own standards and none publishes approval thresholds. A ratio that is comfortable for a business with steady monthly contracts may be tight for one with uneven seasonal sales. What partners want to see is a clear margin between what the business earns and what it owes, after the new payment is added.
Two practical signs of a healthy position: the business could absorb a slow month without missing a payment, and the new funding is tied to something that adds revenue or cuts cost.
Why this matters for Lexington, KY's small employers
Fayette County, KY had 9,295 employer establishments in 2023 (County Business Patterns), and 49.6% had fewer than five employees. At that size, a single equipment loan or advance can take up a large share of monthly cash. Merchant cash advances deserve special care in the calculation: their daily or weekly collections add up fast, and stacking more than one can push coverage below 1.0 even when revenue looks healthy.
A good debt-to-income ratio for a small business is a trend, not one month
A single month can flatter or punish the ratio. Working it out by quarter for the past year shows the direction. Hypothetical figures for the same cafe:
| Quarter | Debt payments | Revenue | Ratio |
|---|---|---|---|
| Q1 | $15,000 | $135,000 | 11.1% |
| Q2 | $15,000 | $150,000 | 10.0% |
| Q3 | $15,000 | $165,000 | 9.1% |
| Q4 | $15,000 | $150,000 | 10.0% |
Flat payments against rising revenue push the ratio down; a new advance collected daily would push it up within one quarter. Bring the quarterly view to the first call, along with a list of every payment counted in it.
Improving the ratios before a request
- Pay down or consolidate the most expensive obligations first.
- Separate personal and business spending so net income is clear.
- Avoid taking a new advance just before a larger request.
- Time the request after a strong, documented period rather than a weak one.
A term loan for a project that adds revenue is judged on both today's ratios and the expected effect. The full request process is on how it works; county figures are on the Lexington, KY page, and more Lodgeleaf articles wait on the blog.
By Lodgeleaf Business Loans · Updated