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In July 2024, the national unemployment rate was 4.3%, the highest level since October 2021. The jobless rate rose by 0.2 percentage point over June and was 0.8 percentage point higher than in July 2023. This continues the 2024 trend of unemployment reaching and staying above 4%.

Unemployment rates were higher in July in 13 states, lower in 1 state, and stable in 36 states and the District of Columbia, the U.S. Bureau of Labor Statistics reported in the most recently available statistics.

South Dakota had the lowest jobless rate in July (2%), closely followed by Vermont (2.1%) and North Dakota (2.2%). The District of Columbia had the highest unemployment rate (5.5%), closely followed by Nevada (5.4%).

A low level of unemployment sounds like great news for American workers, but it presents challenges too. Economists say that inflation cannot ease significantly while unemployment is low. For small businesses, the problem can be particularly acute. Not only is it hard to fill job openings, but salary pressure increases and if there aren’t enough skilled workers, the business can stagnate or slump.

Citing a slowdown in inflation and concerns over the health of the job market, the Federal Reserve cut its key interest rate by a half a percentage point in September.

Looking At Unemployment Data By City

In this story, we are taking a look at unemployment rates by city to get a feel for the job landscape across America. Using Bureau of Labor Statistics (BLS) data, we have created a list that ranks the jobless statistics for the cities that show the largest populations within their respective states.

On our list, Detroit, Michigan, is the city with the highest unemployment in America, followed by Las Vegas, Nevada, and then Los Angeles. Within this list, many fascinating — and even contradictory — trends are revealed that have bearing on small business owners.

Recommended: Best Cities to Start a Small Business

What is the Unemployment Rate and How Is it Calculated?

The labor force participation rate in July 2024 was 62%, which is virtually the same as the last six months. Why doesn’t that align with a 4.3% unemployment average?

The Bureau of Labor Statistics, which falls under the Department of Labor, measures labor market activity, working conditions, price changes, and productivity in the U.S. economy. The unemployment rate for any area is the number of area residents without a job and looking for work divided by the total number of area residents in the labor force.

In other words, the unemployment rate represents the number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed). What the BLS unemployment rate will not tell you is how many people have taken themselves out of the workforce, perhaps becoming so discouraged in their job search that they have given up hope of finding a job.

Some economists say that the nation’s low unemployment could be due, in part, to a low labor participation rate.

U.S. City Unemployment Rates: Lowest to Highest

To gauge the current state of unemployment across all 50 states, we’ve zeroed in on the cities with the largest population in each state, along with the District of Columbia. The data from July 2024 was the most recently obtainable from the Bureau of Labor Statistics. Below is our list of ranked cities, beginning with the city that had the lowest rate of unemployment and moving to the highest.

50. Sioux Falls, South Dakota

After staying in the bottom five for unemployment among the nation’s cities for the last year, Sioux Falls reached the distinction of ranking lowest on our list at 1.6%. “South Dakota traditionally has a lower unemployment rate than the rest of the country,” explained an economics professor in a recent paper. But the state’s low rates throughout 2023 and 2024 (South Dakota showed a jobless rate of 2% in July) creates a “double-edged sword.” The super-tight labor market means economic growth can be difficult, warned the economist.

49. Burlington, Vermont

In July, the city of Burlington showed an unemployment rate of 1.9%, same as in June. The statewide unemployment rate was 2.1%. “There are nearly three job openings for every unemployed Vermonter,” according to the Vermont Department of Labor. Burlington is the industrial, tourist, and financial center of the state, with a population of 44,700. Burlington also has the distinction of being the least populous city in our list.

48. Fargo, North Dakota

Fargo, population 126,000, showed an unemployment rate of 2.3% in July 2024, while the state’s unemployment was 2.2%. One reason North Dakota has had such a low unemployment rate for years is because it is the fifth least-populated state in the United States. Fargo’s economy is based on education, the medical industry, agricultural equipment, and services.

47. Portland, Maine

Maine’s unemployment rate decreased from 3% in May to 2.8% in June and remains there in July. Unemployment has been below 4% for 30 consecutive months, the third longest period of such low rates for the state of Maine. The city of Portland’s was even lower at 2.3%. The state’s economic boom was driven mostly by the leisure and hospitality sector, which added the most jobs since Covid-19.

46. Huntsville, Alabama

The July 2024 jobless rate for Alabama of 2.8% continues the streak of low joblessness for the state. The unemployment rate of 2.7% for Huntsville makes it one of the country’s lowest for cities of its size. A metropolis of rapid growth, Huntsville’s leading sectors are aerospace, defense, information technology, bioscience, and advanced manufacturing.

45. Honolulu, Hawaii

With a population of 345,000, Honolulu had an unemployment rate of 2.8% in July, down from 3% in June. Job gains were seen in professional and business services, trade, transportation and utilities, and private education and health services. Overall, Hawaii had an unemployment rate of 2.9%, continuing its steady decrease in joblessness this year.

44. Manchester, New Hampshire

The state of New Hampshire continued to show low unemployment at 2.5% in July. The jobless rate of Manchester, population 115,000, increased to 2.9% in July, showing a sizable bump from 2.5% in June. The jobless rate is still very low, and that does create special challenges for employers, such as dealing with the size of the workforce, which is smaller in New Hampshire than it was before the Covid-19 pandemic.

43. Nashville, Tennessee

The city of Nashville has seen its unemployment rate drop more than a point over the last five months to 2.9% in July, with the state’s jobless rate coming in at 3%, one of the biggest decreases among all the states. The city is famous for music and entertainment, but healthcare and manufacturing are leading sectors as well. The city, population 1.3 million, is one of the fastest growing in America.

42. Jackson, Mississippi

With a population of 149,000, Jackson had a jobless rate of 2.9% in July, decreasing significantly from 3.3% in June. Jackson also has a lower average cost of living than the average for the U.S. Its major job sectors are advanced manufacturing, health care, information technology, and food processing. The state of Mississippi’s unemployment rate was 2.7%.

41. Cheyenne, Wyoming

With a jobless rate of 3.1%, Cheyenne’s economy is based on light manufacturing, agriculture, the military and government, tourism, and transportation. Cattle- and sheep-raising continue to thrive throughout the region too. The unemployment rate in Wyoming was 2.9% in July, pretty much unchanged for the last six months.

40. Omaha, Nebraska

In July, Nebraska continued its low unemployment rate of 3.2%. Nebraska’s low jobless rate is believed to be due to the dominance of industries like manufacturing and agriculture, which are less volatile than the energy or hospitality sectors. Omaha, population 487,000, had a jobless rate of 2.6%.

39. Des Moines, Iowa

The largest city in Iowa had a July 2024 jobless rate of 3.3%, compared to 3% in June. Iowa’s seasonally adjusted unemployment rate was 2.8% in July, unchanged from June and the same as one year ago.The state is recognized for its leading position in the agricultural sector, particularly corn, soybean, pork, and egg production.

38. Billings, Montana

The largest city in Montana showed an unemployment rate of 3.3% in July. Billings has a history of strength in agriculture and energy; more recently, it has focused on retail. Total employment and the number of people in the labor force were mostly unchanged in Montana in July, leading to no change in the unemployment rate of 3.1% since April.

37. Baltimore, Maryland

At 3.4%, Baltimore continues to rank low for unemployment, although it has increased since a low of 2.4% six months ago. Maryland also ranks among the lowest states in unemployment at 2.8%. What makes the achievement of the Baltimore metropolitan area particularly newsworthy is that for the last year it has consistently posted in the bottom 5 for joblessness among large U.S. metro areas with 1 million or more in population.

Recommended: Maryland Small Business Grants

36. Virginia Beach, Virginia

Virginia Beach has a jobless rate of 3.5%, edging up significantly from 2.4% three months ago. Real estate, defense, and tourism are major sectors of the city’s economy. The state has an overall jobless rate of 2.7%, lower than its largest city. According to household survey data in July, the labor force decreased by 4,066 (to 4,570,647) as the number of unemployed residents increased by 2,160 (to 124,643). The number of employed residents decreased by 6,226 (to 4,446,004).

35. Oklahoma City, Oklahoma

The largest city in Oklahoma hung in there with a low jobless rate of 3.5% in July. Oklahoma City has one of the world’s largest livestock markets, with oil, natural gas, and petroleum products as its largest sectors. As for the state, Oklahoma’s rate of 3.5% is part of a slow increase over the last six months.

34. Little Rock, Arkansas

Arkansas’s unemployment rate was 3.3% in July 2024, unchanged for the last four months. Little Rock, its largest city at 202,000 residents, showed a jobless rate of 3.6% in July 2024, up a bit from 3.4% in June. Healthcare is a leading sector in Little Rock, followed by manufacturing and construction.

33. Salt Lake City, Utah

Salt Lake City had a jobless rate in July 2024 of 3.6%, the same as in June. Known as the “Crossroads of the West,” the city’s major industries are government, trade, transportation, utilities, and professional and business services. The state’s unemployment rate is 3.2%.

32. Bridgeport, Connecticut

The unemployment rate in Bridgeport, population 148,000, came in at 3.6% in July, showing a major improvement since May 2024, when it was 4.4%. The state was at 3.6% in July as well. While some fled New York or New Jersey during the pandemic, Connecticut added 66,000 people in 2021. However, Bridgeport struggles, with some 19% of its residents living in poverty.

31. Boise, Idaho

With a population of 237,000, Boise had a jobless rate of 3.7% in July, inching up from 3.6% in June. The major economic drivers in the region include semiconductor and other computer product manufacturing, food product manufacturing, administrative and business support services, and construction. Statewide unemployment stood at 3.5%.

30. Milwaukee, Wisconsin

The state of Wisconsin had a jobless rate of 3% in July 2024, edging up from its unemployment rate low of 2.9% in June. Its largest city, Milwaukee, had an unemployment rate of 3.7%. The three sectors that comprise most of Milwaukee’s workforce are service sectors, manufacturing, and retail trade.

29. Minneapolis, Minnesota

The unemployment rate of 3.8% in July puts Minneapolis on a definite trajectory of increases, as the jobless rate was 2.6% in May. The Twin Cities’ industries are dominated by healthcare, finance, manufacturing, and technology. Minnesota’s unemployment rate was 2.9%.

28. Jacksonville, Florida

The largest city in Florida with a population of 954,000, Jacksonville had a jobless rate of 3.8% in July, edging up from 3.6% in June. The state of Florida showed an unemployment rate of 3.3% in July. It stands out as one of the states with the largest gains in employment (+222,200). Florida’s unemployment rate has remained lower than the national rate for 40 consecutive months.

Recommended: Recommended: Small Business Grants in Florida

27. Atlanta, Georgia

Georgia’s largest city with a population of 496,000, Atlanta had a jobless rate of 3.8% in July, compared with 3.9% in June. Georgia’s unemployment rate was 3.4%. The sectors with the most job gains included accommodation and food services, health care and social assistance, arts, entertainment, recreation, and management of companies and enterprises.

26. Phoenix, Arizona

Phoenix, population 1.6 million, has seen its unemployment rate edge upward. It’s now at 3.9%, a full percentage point higher than in April 2024. One of the fastest-growing cities in America, Phoenix reached a record jobless high of 13.7% in April of 2020 and a record low of 2.5% in April of 1998. In the last 50 years, Phoenix’s economy has been powered by hospitality and leisure, but the city is also home to a growing number of high-tech, IT, renewable energy, and bioscience companies. Arizona had a 3.4% jobless rate in July.

Recommended: Small Business Grants in Arizona

25. Anchorage, Alaska

Anchorage, the city with the largest population in Alaska, had a jobless rate of 4% in July 2024, down from 4.5% in June. Alaska often shows a relatively high unemployment rate. Over the last 40 years, the average unemployment rate in the United States has been 6.3%, while in Alaska, it averaged 7.9% since 1976. Therefore, the July rate of 4.5%, while higher than the national average, is low for this state.

24. Charleston, South Carolina

The July jobless rate of 4.2% for Charleston, population 151,000, is a significant increase from 2.4% in April. The rates are still much lower than in April 2020, when unemployment raged at 13%. The city’s economic strength is diverse, ranging from aerospace and life sciences to hospitality. The statewide unemployment rate was 3.9% in July 2024.

23. Charlotte, North Carolina

With a population of 879,000, Charlotte is home to corporations such as MetLife, NASCAR, Wells Fargo, Bank of America, and Lowe’s. Its unemployment rate was 4.2% in July, while the state’s jobless rate was 3.7%. Unemployment rates (not seasonally adjusted) increased in 83 of North Carolina’s counties in July 2024, decreased in three, and remained unchanged in 14.

22. Boston, Massachusetts

At 3.5%, Massachusetts showed low unemployment in July, but Boston’s unemployment moved up to 4.2%, up from 2.8% in April. The city is the economic engine and cultural hub of New England, with higher education, health care, and financial services as the major drivers. In a recent survey of cities most attractive to recent college graduates when considering job openings and affordability, Boston came in at number 12, making it the top city in the Northeast.

21. Kansas City, Missouri

Missouri had a jobless rate of 3.8% in July 2024, and Kansas City, its largest city, had a rate of 4.3%, up from 3.9% in June. The unemployment rate in Missouri reached a record high of 11.4% in April of 2020 and a record low of 2.1 in May of 2022. Kansas City is the third largest beef-processing city in America and has strong sectors in health care, tech, retail, and finance.

20. Denver, Colorado

Colorado’s jobless rate was 3.9% and Denver, its largest city, had a rate of 4.3%. Considered a magnet for work-from-home professionals, Denver is a fast-growing city, but one with housing costs that are 36% higher than the national average. Software and financial services are among its hottest industries. Aerospace, digital communications, and food and beverage sectors are also expanding.

Recommended: Small Business Grants in Colorado

19. New Orleans, Louisiana

The July 2024 jobless rate of 4.4% in the Big Easy ticked down from 4.6% the previous month. And unemployment has come a long way since its alarming Covid-19 days of 20% in April 2020 and an April 2021 rate of 9%. As a tourist favorite and a major port on the Gulf Coast, New Orleans is considered an economic and commercial hub, and Louisiana’s 3.9% unemployment rate is considered low for the country.

18. Indianapolis, Indiana

The city of Indianapolis showed an unemployment rate of 4.4% in July. An economist said in 2023 that there were 5 job seekers for every 10 open positions in the state. Central Indiana’s life sciences and healthcare sector generates nearly $84 billion in total economic output. The state of Indiana showed a jobless rate of 4%.

17. Charleston, West Virginia

The city with the largest population in West Virginia has 46,700 people and had an unemployment rate of 4.4% in July, the same as in April. As it is the state capital, Charleston has government jobs as well as those in trade, utilities, education, and medicine. The chemical industry and the manufacturing sector are also significant. The jobless rate in West Virginia was 4.2% in July.

16. Portland, Oregon

Oregon’s unemployment stands at 4.1%, while Portland, its largest city, has a jobless rate of 4.4%. Seventeen counties in Oregon had unemployment rates at or below the statewide rate of 4.1% and nineteen had rates at or below the U.S. unemployment rate of 4.3%.

15. Columbus, Ohio

Ohio’s unemployment rate was 4.5% in July 2024. Columbus, its largest city, also clocked in at 4.5%. The number of workers unemployed in Ohio in July was 264,000, up from 254,000 in June. Overall, the number of unemployed has increased by 67,000 in the past 12 months from 197,000. The July unemployment rate for Ohio has increased 1.1 percentage points from 3.4% in July 2023.

14. Wichita, Kansas

The unemployment rate in Wichita, population 395,000, was 4.7% in July. Agriculture, manufacturing, healthcare, and energy drive the Wichita regional economy. The state of Kansas had a jobless rate of 3.2% in July, which is lower than the national unemployment average.

13. Wilmington, Delaware

Located midway between Washington, D.C. and New York City, Wilmington is Delaware’s largest city and its economic engine. Wilmington had an unemployment rate of 4.8% in July, a sizable increase from 3.7% in May. The state itself is at 4.1% unemployment.

12. Philadelphia, Pennsylvania

The unemployment rate for Philadelphia stood at 4.8% in July, up from 3.9% in April. The state of Pennsylvania ranked at 3.4% in July 2024. While that may not sound like one of the good news stories, Philadelphia’s jobless rate continues a record low for the state. This low unemployment bolsters the region’s ongoing recovery from the pandemic, which hit Philly hard and led to the loss of more than 100,000 jobs in the first two months of Covid-19 alone.

11. Houston, Texas

Houston’s July unemployment rate at 4.8% was higher than the state of Texas’ rate of 4.1%. Since June 2022, Texas employment grew by over 542,500 positions — the largest annual increase in the nation. The expanding ranks of the unemployed is believed to reflect an increase in the size of the metropolitan workforce rather than layoffs in the state, which has the second-highest population in the United States.

Recommended: Small Business Grants in Texas

10. Seattle, Washington

Seattle, population 733,000, was tracking well above the national unemployment rate with a jobless figure of 4.9% in July. Thousands of tech sector layoffs in the Seattle area have had an impact, but the city continues to support innovation.The state of Washington’s unemployment rate was also 4.9% in July.

9. Albuquerque, New Mexico

The largest city in New Mexico had a jobless rate of 5.1% in July, up from 4.5% in June. It’s still a long way down from its pandemic high of 10%. Albuquerque and the rest of the state are on a growth curve — the top three industries are oil drilling and gas extraction, scientific research and development, and hospitals. New Mexico’s unemployment rate was 4% in July.

8. Louisville, Kentucky

With an unemployment rate of 5.2% in July, Louisville is showing a sharp increase since June when its jobless rate was 4.5%. In just April, the jobless rate was 3.8%. Louisville, with a population of 628,000, is known for shipping and cargo and, more recently, for major manufacturing (with two Ford plants in the region) and health care. Kentucky’s jobless rate of 4.7% is higher than the national average.

7. Providence, Rhode Island

With a population of 189,000, Providence had a jobless rate of 5.2% in July and the state’s unemployment rate was 4.5%. About one-third of the city’s economy is based in trade, transportation, utilities, and educational and health services. The four Fortune 500 companies based in Rhode Island are CVS Heath, United Natural Foods, Textron, and Citizens Financial Group.

6. Newark, New Jersey

In July, the city’s unemployment rate was 5.6%, up from 5% in June. However, this is a marked decrease from a high of 9.7% in 2010. The city of Newark has a population of over 305,000, and some 25% of residents are living in poverty, according to U.S. Census data. The state’s jobless rate of 4.7% is above the national average.

5. New York, New York

The Big Apple had a jobless rate of 5.6% in July, rising a full percentage point since April’s rate of 4.6%. This makes it one of the cities on our list with an unemployment rate higher than the national average. However, New York City, with its population topping 8.4 million, also shows gains in employment four years after the start of Covid-19 lockdowns. New York State is estimated to have lost about 2 million jobs in the immediate wake of the pandemic. The state has a jobless rate of 4.3%.

Recommended: Small Business Grants in New York

4. Chicago, Illinois

The July 2024 unemployment rate of 6.4% for the city was the same as the June jobless rate. The city and its suburbs are home to 35 Fortune 500 companies, with strengths in manufacturing, printing, insurance, transportation, financial trading, and food processing. Unfortunately, Illinois’s rate of 5.2% was one of the highest in the nation as well. The number of unemployed workers was 341,600, up 4.2% from the prior month, and up 19.4% from the same month one year ago.

3. Los Angeles, California

The city on our list with the second-highest population in America (at 3.9 million) had an unemployment rate of 6.5% in July, up from 5.9% in June. Both the city and the state of California have struggled since Covid-19. The state’s unemployment rate in July was 5.2%. Several factors are believed to contribute, including a mismatch between job skills among those who seek employment and what skills are needed.

2. Las Vegas, Nevada

Las Vegas, the largest city in Nevada, had the second-highest unemployment rate on our list at 6.7%, up from 6.2% in June 2024. Las Vegas shows a lot of turbulence in employment, with a high number of people in the workforce actively looking for jobs. Nevada’s rate was 5.1%. Ongoing recovery from the Covid pandemic and increases in short-term unemployment are contributing to Nevada having the highest unemployment rate in the nation, a state economist says.

1. Detroit, Michigan

The unemployment rate of 8.2% in Detroit in July 2024 was the highest on our list, and showed one of the largest increases month over month in the country, up from 6.2% in June. The city has gone through a rough economic ride, starting well before Covid-19: Detroit experienced a 61% decrease in population from 1950 to 2010, lowering its ranking from the 4th most populous city in America to the 27th. Detroit’s jobless rate was an eye-popping 27% in June 2009. The state of Michigan’s jobless rate was 4.3% in July, the same as the national average.

Notable Mention: Washington, D.C.

The nation’s capital of Washington, D.C., population 712,000, showed an unemployment rate of 6.3% in July, which is one of the highest for any large city in America.

What Factors Affect Unemployment Rate?

Unemployment is a key measure of the health of the American economy and considerable resources are put into analyzing it. There are many different reasons for unemployment. Apart from the common causes found in any economy — a worker leaving for another job or being fired — there is cyclical unemployment and structural unemployment.

Cyclical unemployment is caused by economic downturns or is related to changes in business conditions. As the name indicates, it can be temporary. After a recession ends, unemployment typically falls.

Structural unemployment is different. It usually means there is a mismatch between the jobs available and the skill levels of the unemployed. Technological changes, a lack of relevant skills, and jobs moving overseas cause structural unemployment.

Structural unemployment can be hard for a society to deal with — it produces permanent disruptions in the economy and obviously a lot of stress among the people who want to work but can’t get a job.

Recommended: How Does Unemployment Work?

How Does a Low Unemployment Rate Affect the Economy?

The problem of high unemployment seems far away indeed. A reasonable unemployment rate is somewhere between 3% and 5%. The current rate of unemployment means that the economy is producing near its full capacity, maximizing output, and driving wage growth.

However, the labor market can reach a point where each additional job added does not create enough productivity to cover its cost. This causes an output gap, or “slack,” in the labor market. The economy is in danger of becoming “overheated.”

How Does Unemployment Affect Small Businesses?

An increasing demand for labor coupled with a falling unemployment rate can result in wage inflation. With fewer people available to work, employers have to increase wages to attract and hold onto talent. While that’s pleasant for the workers, some businesses can’t afford to pay a lot more. The money that might go to growing the business has to go toward payroll.

Also, when there are more jobs than there are people with the necessary skills and experience, employees may begin feeling overwhelmed and stressed. Small businesses typically have less money to funnel toward training and recruitment. This is a time when small businesses may turn to debt financing, whether it’s seeking a small business loan or looking for investors.

Recommended: Six Step Guide to Getting a Small Business Loan

The Takeaway

The national unemployment rate of 4.3% is edging higher after two years of markedly low unemployment, according to the Bureau of Labor Statistics. The cities of Detroit, Las Vegas, Los Angeles, and Chicago all show jobless rates of more than 6%.

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SOSMB-Q324-041

Credit and debit memos are documents or items on financial statements that add to (in the case of a credit) or reduce (in the case of a debit) your account balance. They are used to correct charge mistakes or any changes in the amount you owe or the amount due to you.

When reading bank statements or invoices from vendors, you may see these two terms and want to know more about what they are and why they are important.

What Is a Credit Memo?

You may see a credit memo on an invoice from a vendor, on your bank statement, or on your credit card statement. No matter where you see the credit memo, it signifies the same thing.

A credit memo is shown when money is added to an account. In the case of a bank or credit card statement, you might see a credit memo if you were reimbursed for fees or earned interest on a bank account. With a vendor invoice, you might see a credit memo if you were overcharged on a previous invoice and are now receiving credit for that amount you overpaid.

Use Cases

A common use case for a credit card memo is tracking a business expense that you may have returned. For example, a small business owner makes a purchase for office supplies using a company credit card. In the memo field, they write “Office supplies for Q3” to clearly note the purpose of the purchase. If the business owner returns the office supplies, they’ll see a credit on their account for the purchase price. This will be a new line item on their ledger, as opposed to the charge just disappearing.

Information Found on a Credit Memorandum

In addition to showing the amount credited, a credit memo may also have the following details. If you’re keeping statements, it can be helpful to know what to look for to find a particular credit memorandum, including:

•  Payment terms

•  Invoice number

•  Description of item(s) purchased

•  Price paid or owed

•  Details on credit

•  Number of items on the purchase order

•  Date of purchase

•  Customer’s bank account number

•  Financial institution number

•  Shipping address

For a bank or credit card statement, you will find the date of the credit issued, a description of the credit, and the amount.

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Bank Account and Credit Card Statement Credit Memos

A credit memo on a bank account or credit card statement indicates a positive adjustment or refund. It reduces the amount owed by the customer, often resulting from returns, billing errors, or overpayments. Credit memos include:

•  Interest earned

•  Fees reimbursed

•  Reimbursement of unauthorized transaction

•  Credit for returned product purchase

Vendor Invoice Credit Memos

A vendor invoice credit memo is issued by a supplier to adjust or reduce the amount owed by a customer. It may include:

•  Correction of invoice error

•  Credit for overpayment

•  Discount for paying invoice early

Recommended: What Is a Personal Guarantee?

What Is a Debit Memo?

In contrast, a debit memo, also called a debit memorandum, decreases the amount of money in an account.

For bank and credit card statements, that might be a fee or interest charged. For vendor invoices, the debit memo might happen when you are charged a late fee for an unpaid invoice.

It’s important to understand the difference between a credit memo vs. debit memo because the amount of money you have in your business bank account (or the amount you owe on a credit card or vendor invoice) will be impacted, as will your accounts payable.

Recommended: Small Business Financial Ratios

Use Cases

A common use case for a debit memo would be if a company invoiced the wrong amount to the supplier, for example. If the invoice was too low, the company can issue a debit memo to correct it. The invoice would then be increased, and the supplier would make the appropriate adjustments with the memo, as well.

Information Found on a Debit Memorandum

The same information can be found on a debit memorandum, though, of course, you’ll find details on the debit, rather than the credit, including:

•  Payment terms

•  Invoice number

•  Description of item(s) purchased

•  Price paid or owed

•  Details on debit

•  Number of items on the purchase order

•  Date of purchase

•  Customer’s bank account number

•  Financial institution number

•  Shipping address

For a bank or credit card statement, you will find the date of the debit charge, a description of the debit, and the amount.

Bank Account and Credit Card Statement Debit Memos

A debit memo on a bank account or credit card statement indicates a charge or deduction. This can occur from transactions like fees, withdrawals, or adjustments due to billing errors. Debit memos increase the amount owed or reduce the account balance. Bank account and credit card statement debit memos include:

•  Monthly account fees

•  Overdraft fees

•  Credit card interest charges

•  Annual credit card fees

Vendor Invoice Debit Memos

A vendor invoice debit memo is issued by a buyer to request an increase in the amount owed to the vendor, often due to underbilling or additional services. It may include things like:

•  Fees for late payments

•  Reconciliation for undercharging on previous invoice

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Key Differences Between a Credit Memo vs Debit Memo

Here are the key differences between a credit memo and a debit memo:

•  Purpose:

◦  Credit Memo: Reduces the amount owed by the customer.

◦  Debit Memo: Increases the amount owed by the customer.

•  Usage:

◦  Credit Memo: Issued for refunds, returns, overpayments, or billing errors.

◦  Debit Memo: Issued for underbilling, missed charges, or additional services.

•  Effect on Account Balance:

◦  Credit Memo: Decreases the account balance for the business or creates a refund.

◦  Debit Memo: Increases the account balance for the business or adds to the amount due.

•  Financial Direction:

◦  Credit Memo: Reflects a credit to the buyer’s account.

◦  Debit Memo: Reflects a debit to the buyer’s account.

Recommended: Accounts Payable: What It Is and How It Works

When Are Credit Memos and Debit Memos Used?

There are a few scenarios where you, a bank, a credit card company, or a vendor may use a credit or debit memo.

The first is to correct an error. If you were overcharged (or undercharged) on an invoice, or if the amount owed otherwise included an error in calculation, the easiest way to rectify this error is by issuing a credit or debit memo on the next invoice.

If a customer wants to return a product or get a refund, a credit memo may be issued. Note that a credit memo isn’t the same as a refund. With a refund, the original transaction is typically reversed. With a credit memo, a separate transaction is conducted to credit the amount owed.

Another situation where a credit memo may be used is when a customer is given a discount for a purchase. Maybe you paid an invoice early and got a credit for a percentage of the invoice amount, or maybe the product was on sale or you purchased in bulk and got a discount through a credit memo.

With a debit memo, you may be charged a fee, such as for a late payment, an overdraft, or simply a monthly fee for a bank account.

Recommended: EBITAR Explained

The Takeaway

Understanding both credit memos and debit memos can help you more easily interpret bank and credit card statements, as well as vendor invoices. This helps you better manage your business finances.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Is a debit memo positive or negative?

A debit memo, in the case of a vendor invoice or credit card statement, increases the amount owed. In the case of a bank statement, it’s a reduction in the amount of money in the account.

Is the credit memo a refund?

A credit memo is similar to a refund, but it’s not exactly the same thing. Rather than reversing the initial charge, a credit is given as a separate transaction for the same amount as the original purchase.

Why is it called a credit memo?

A credit memo provides a credit, or increase, in the amount of money in an account.

Photo credit: iStock/Inside Creative House

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Every business, from the largest corporation down to a one-person operation, needs capital to operate and grow. Capital can help a business pay its expenses, purchase real estate, or take advantage of opportunities for expansion.

When you’re running a small business as a sole proprietor, you may not have access to the same kind of cash that a larger business may, so you might consider financing as a way to get that capital. Luckily, there are different types of small business loans available for sole proprietors that may be able to help you get access to cash when you need it.

Keep reading to learn more on what sole proprietorships are, different types of business loans offered to sole proprietors, how to qualify for a business loan, and more.

What Are Sole Proprietorships?

A sole proprietorship is a business structure where a single individual owns and operates the business. It is the simplest and most common form of business, often used by freelancers, independent contractors, or small business owners.

In a sole proprietorship, there is no legal distinction between the owner and the business, meaning the owner is personally responsible for all debts and liabilities. The owner retains full control of decision-making and profits, but also assumes all risks.

Sole proprietorships are easy to set up, with fewer regulatory requirements and lower costs compared to other business structures, like corporations or partnerships.

Pros and Cons of Sole Proprietorships

Before we look at small business loans for sole proprietors, let’s briefly explore some benefits and drawbacks to running your business as a sole proprietorship.

Now let’s look at loans typically available for sole proprietors so you can decide which is right for you.

Recommended: Sole Proprietorship vs LLC: How to Choose

SBA Loans

SBA loans for sole proprietors are offered by a variety of lending institutions. The most popular is the 7(a) program, which can be secured for up to $5 million depending on your qualifications. Interest rates vary by lender, and terms range between five and 25 years. Typically, these loans can be more difficult than some other options to qualify for.

Online Lenders

Online lenders offer different types of small business loans, including short- and long-term business loans, equipment financing, business lines of credit, merchant cash advances, SBA loans, and invoice factoring. Online lenders typically have less stringent qualification requirements and fast funding times.

Bank Loans

Banks and credit unions offer sole proprietor loans, though they may be harder to qualify for than SBA loans, especially if your credit score is under 700. Rates and terms vary by lender.

Lines of Credit

Another funding option for sole proprietors is a business line of credit. While loans provide you with a lump sum of capital all at once, a line of credit gives you access to a certain amount decided by the lender. You pay interest only on the amount you’ve drawn out. Rates and terms vary by lender.

Business Loan Alternatives

Loans and lines of credit like those listed above aren’t your only options for getting capital as a sole proprietor. Here are a few business loan alternatives to consider:

Business Credit Cards

Business credit cards can allow you to make purchases for your company when you need to, even if you don’t have cash on hand. If you don’t have good enough credit for a business loan, having a credit card and paying your bill on time is one way to help you build a positive credit record for your business. Further down the road, you might be able to qualify for other financing options.

Recommended: What Is the Minimum Credit Score for a Business Loan?

Crowdfunding

Crowdfunding is another option for getting access to capital, with the added benefit that you might not need to pay the money back. A company can set up a campaign on one of several crowdfunding sites to raise money for a new product line, for example. Anyone can donate to your project, and you don’t have to pay that money back. You may, however, be required to offer perks, like products or t-shirts to those who donate.

Applying for a Business Loan for a Sole Proprietor

If you’re considering applying for a business loan as a sole proprietor, start by understanding what each particular lender you’re interested in requires for the application process.

Some lenders list the specific credit scores you need to have to qualify, as well as how long you need to have been in business. Others do not. But with a little research online, you may find other websites that tell you what a particular bank requires, even if the bank’s website doesn’t.

Documentation Needed to Apply

Before applying, get your business documents and information in order so you can streamline the process. You’ll typically need to provide the following documents:

1.   Business Plan: A business plan is an outline of your business strategy, financial projections, and how the loan will be used.

2.   Personal and Business Tax Returns: Lenders often request 2-3 years of both personal and business tax returns to assess financial stability.

3.   Financial Statements: This includes profit and loss statements, balance sheets, and cash flow statements.

4.   Bank Statements: The lender usually wants the last 3-6 months of business and personal bank statements.

5.   Legal Documents: Legal documents include business licenses, articles of incorporation, contracts, leases, and any other relevant legal papers.

6.   Personal and Business Credit Reports: These assess your creditworthiness and payment history.

7.   Collateral Documentation: If applying for a secured loan, documents showing ownership of collateral, like real estate or equipment, will be needed.

Reviewing Lender Offers

When looking for a small business loan for a sole proprietorship, it’s always best to shop around to find the best rate and terms for your situation. Many lenders offer the opportunity to prequalify, meaning that you can provide a few details about yourself and your business to see if you’d be eligible for financing. This should not impact your credit, and it can help you identify which lender offers the best terms.

Before applying, it’s a good idea to check your credit scores and see where they stand. It’s very helpful to have a business credit score established. If not, your personal credit score can be referred to.

The Takeaway

Taking out a small business loan for a sole proprietor can give you access to the capital your business needs to thrive. There are a variety of funding types available, and with so many options, it’s just a matter of choosing the one that best fits your business’ needs.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Can sole proprietors get SBA loans?

Yes. SBA loans are open to all types of business structures, including sole proprietorships. Eligibility typically depends on creditworthiness, business viability, and the ability to repay the loan.

What credit score do you need to get a business loan as a sole proprietor?

The credit score requirements will vary from one lender to another. As an example, an SBA loan for a sole proprietor might require a credit score of at least 640.

What are the benefits of being a sole proprietor?

There are many benefits to running your business as a sole proprietor. These include simplified taxes, retaining control of decision-making, and no complicated paperwork or fees to file.

Is getting a loan as a sole proprietor difficult?

Getting a loan as a sole proprietor can be challenging since approval depends on personal credit, income, and collateral. However, alternative lenders and SBA-backed loans can help improve access to financing options.

Photo credit: iStock/laddawan punna

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Businesses that need cash quickly but don’t have strong credit will sometimes turn to an alternative type of funding called a merchant cash advance (MCA). With an MCA, a financing company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.

An MCA can be helpful for covering cash flow shortages or short-term expenses, but if you end up taking out more than one merchant cash advance, you can end up paying different (and potentially high) interest rates and fees for each. Plus, you have to deal with different payment schedules for each MCA.

A merchant cash advance consolidation is an option that lets you roll up all of those advance payments into one. Ideally, an MCA consolidation has the potential to reduce what you’re paying in interest and fees. Here’s what you need to know about this type of consolidation loan.

What Is a Merchant Cash Advance?

Not every business qualifies for a traditional bank loan. Perhaps it hasn’t been in business long enough to be eligible, or maybe it doesn’t meet the credit requirements for a small business loan. That’s when a merchant cash advance may be useful.

An merchant cash advance is not a loan, but rather an advance on future sales. To determine eligibility, MCA providers may not rely heavily on criteria like time in business and/or credit scores, but instead focus on revenues. That can make it easier to get than other types of financing.

How MCAs Work

When you get an MCA, you receive a lump sum payment. Typically, MCAs express the interest they charge as a factor rate (often ranging from 1.1 to 1.5) rather than as a percentage. The factor rate does not include any additional fees the merchant cash advance company may charge you, such as administrative or underwriting fees.

How MCA Repayment Works

The repayment on an MCA works differently than other types of business loans. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full. Repayment periods can range anywhere from three to 18 months. Generally, the more you make in credit card sales, the faster you’ll repay the advance.

The downside is that MCAs tend to have much higher fees and interest rates than traditional small business loans, making them a costly financing option.

When you convert factor rates plus fees into an annual percentage rate (APR), the APRs on merchant cash advances can run as high as 350%, depending on the lender, size of the advance, fees, business revenue, and how long it takes to repay the advance.

What Is Merchant Cash Advance Consolidation?

A small business owner might take out a merchant cash advance to see their way through a slow period. Then, when they struggle with repayments, they may apply for another MCA to help repay the first. This is a process known as loan stacking. The company could then end up with multiple repayment schedules and paying different factor rates and different amounts for each advance.

A merchant cash advance consolidation rolls multiple MCAs into a single new loan. The consolidation loan typically pays off your existing MCAs and allows you to make one payment, often monthly, to the consolidation lender. Ideally, the consolidation loan will have a lower interest rate than the average of the multiple advances.

Recommended: Loans for Sole Proprietors

Signs You Need Consolidation

Signs you need a merchant cash consolidation include:

•  Multiple MCA loans: If your business has taken out many MCAs, a consolidation loan can help you streamline your payments and possibly save money on interest.

•  High interest rates: MCAs often come with steep fees, so consolidating into a lower-rate loan could reduce overall costs.

•  Falling behind on payments: Missing or struggling with payments is a strong indicator consolidation is necessary.

However, there are a few things to consider before you jump into MCA consolidation. One is whether or not your existing MCA lenders will charge you a prepayment penalty fee if you pay off your advances early. You’ll also want to find out if there are any upfront fees you have to pay for the new consolidation loan, since this can eat into your savings.

If, after running all the numbers, it looks like you can save money and streamline repayment, it may be a good time to consider a merchant cash advance consolidation.

Recommended: How Does Debt Consolidation Work?

What to Consider Before Applying

Before applying for a consolidation loan, you’ll want to look at what you’re currently paying in interest and what you’d qualify for with a new loan. Also, consider any fees for the new loan and any payoff penalties you’ll owe your current lenders. If, once you crunch the numbers, your total debt hardly goes down, there’s probably no sense in taking on a new consolidation loan.

When deciding whether it makes sense to do an MCA consolidation, you also want to look at the repayment period and what your payments with the new loan will be. A shorter repayment period can mean larger payments that you might not be able to afford. And, while a longer repayment period can mean smaller payments, it will likely mean paying more in total interest.

Examining the options can help you find the best path forward for your business.

Potential Drawbacks and Risks

Merchant cash advance (MCA) consolidation loans can provide relief, but they come with potential drawbacks and risks, including:

•  Extending the repayment period, which potentially increases the overall interest costs.

•  Paying high fees, which could negate the benefits of combining advances.

Additionally, if you’re consolidating to manage cash flow, it could be a sign of deeper financial issues, and relying on more debt may worsen the situation.

Refinancing vs Consolidation

If you’ve heard of business loan refinancing, you may think it’s the same as merchant cash advance consolidation, but these aren’t exactly the same.

It’s true that both can potentially lower your interest rate and/or change your payment term. However, when you refinance, you’re replacing one MCA with a new one or with a small business term loan. When you opt for an MCA consolidation, you’re rolling multiple MCAs into a new MCA or other type of business loan.

Recommended: Refinancing Your Student Loans While Starting a Business

Types of Consolidation Loans

Lenders may have different approaches to help you with consolidating your loans. Some will buy out the loan and pay it off directly, while others will lend you the money, after which it’s your responsibility to pay off your existing MCAs.The following types of loans can be used to consolidate your MCAs:

Merchant Cash Advance

If you’ve taken out multiple MCAs, it’s likely because your business doesn’t have great credit and may not qualify for other types of loans. If that’s the case, you might consider a new, larger merchant cash advance to consolidate your existing MCAs, ideally with more favorable terms.

Be aware that you will likely have a short repayment period, perhaps between a few months and three years.

Online Lenders

Another consolidation option if you don’t have excellent credit is taking out a consolidation loan with an online lender. Interest rates may be lower than with a merchant cash advance and repayment terms may be longer. A longer repayment term typically means your monthly payment will be lower; however, you’ll pay more in interest overall than with a shorter repayment term.

SBA Loans

SBA loans like the 7(a) program can be used to consolidate business debt that is approved by your lender, if you qualify. Repayment terms can be up to 25 years, and rates on SBA loans are among the lowest of any financing option for businesses.

Traditional Bank Loans

If you’ve been able to build your business or personal credit since taking out the MCAs, you may qualify for a bank loan with lower rates and longer repayment terms. You can then use the proceeds of the loan to pay off your existing MCAs.

The Takeaway

If you feel like you’re drowning because you’re paying too much, too often, for multiple merchant cash advances, consolidating with a new advance or small business loan may be a solution that could help you lower your costs and roll everything up into one monthly payment.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is a merchant cash advance consolidation?

A merchant cash advance (MCA) consolidation combines multiple merchant cash advances into a single MCA with more manageable repayment terms. Ideally, you’ll receive better rates and terms with your new merchant cash advance.

What happens if I don’t repay my merchant cash advance?

If you don’t repay your merchant cash advance (MCA), the lender may increase withdrawal amounts, freeze business accounts, or pursue legal action. Your personal and business assets could be at risk, and your credit score could be negatively impacted. This could affect financing options down the line.

Why consolidate your merchant cash advances?

The main reason to consolidate your merchant cash advance (MCA) is to simplify your payments. Rather than making multiple payments each week or month, you’ll only have to make one. Consolidating could also reduce your interest rate, saving you money over the life of the loan.

Photo credit: iStock/ipopba

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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If you’re considering taking out a business loan, you’ll want to make sure your company looks like a safe bet in the eyes of a lender. One of the metrics they may look at is your debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio.

Debt-to-EBITA is a financial metric that looks at how much of the income your business is generating is available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

Read on to learn how this ratio is calculated and how to know if your company’s debt-to-EBITDA is healthy.

What Is Debt-to-EBITDA?

Simply put, debt-to-EBITDA measures the ability of your company to pay its debts off. It compares your actual cash earnings to your financial obligations, including debt and other liabilities.

A high debt-to-EBITDA ratio might result in a lower business credit score, whereas a lower ratio could positively impact your credit profile, making it easier to qualify for financing at favorable rates and terms.

What Is EBITDA?

EBITDA stands for earnings before interest, tax, depreciation, and amortization. It is a measurement of a company’s profitability before those expenses are taken out.

While not accepted by GAAP (generally accepted accounting principles), EBITDA is often used by analysts and investors to compare the profitability of two companies in the same industry.

The reason is that EBITDA removes expenses that can vary depending on a company’s capital structure (and how much it spends on interest on debt), historical investments (which affects its depreciation and amortization expenses), and tax burden (which can vary from state to state).

You can calculate EBITDA by looking at your income statement and adding interest, tax, depreciation, and amortization back to net income.

EBITDA = Net Income + Interest + Taxes + Amortization + Depreciation

What Is Debt?

Debt is anything your company owes another company or individual and includes both short-term and long-term debt obligations. You can find these numbers in a company’s quarterly and annual financial statements.

Exactly what obligations are included in total debt for the debt-to-EBITDA ratio, however, is somewhat open to interpretation. Often, it’s defined as all interest-bearing liabilities, such as small business loans.

If you want to take on more debt, lenders may look at financial metrics like your debt-to-income ratio, debt-to-equity ratio, and your debt-to-EBITDA ratio. All of these can help a lender understand the likelihood of your being able to repay a new loan with the given amount of debt you currently have.

Formula for Calculating Debt-to-EBITDA

Calculating the debt-to-EBITDA ratio is done by dividing a company’s short-term debts and long-term debts by its EBITDA. The main goal of this ratio is to reflect the amount of cash available with the company to pay back its debts.

Debt-to-EBITDA Ratio Formula

To calculate the ratio for debt to EBITDA, you would use this formula:

Debt-to-EBITDA Ratio = Total Debt / EBITDA

What the Debt-to-EBITDA Ratio Tells You

The debt/EBITDA ratio compares a company’s total liabilities to the actual cash it is bringing in. The goal of this financial ratio is to show how capable the business is of paying its debt and other liabilities.

Generally, the lower the debt-to-EBITDA ratio, the more money your company has available to cover its financial obligations when they come due. A higher debt-to-EBITDA ratio, on the other hand, suggests that the business is heavily leveraged and might run into trouble paying upon its debts.

What’s considered a good debt-to-EBITDA ratio will vary by industry. Generally speaking, however, a ratio of 4 or 5 is considered to be high. This may be a red flag to potential investors or lenders that your business is over leveraged and could potentially default on its debts.

Uses of Debt-to-EBITDA

So when would you actually use your debt-to EBITDA ratio? If you’re looking to borrow money for your business, it can be smart to calculate your debt-to-EBITDA ratio before you get to the business loan application so you know where you stand.

If you borrow money from a bank, there may be a requirement to meet a certain debt-to-EBITDA ratio in your loan agreement. If you can’t keep that ratio, you may risk the loan being called.

If you are considering bringing on investors, they may also want to look at your debt-to-EBITDA ratio. Investors will often use this ratio to gauge the approximate amount of time it will take a company to pay off all of its debts with its available cash.

Recommended: How to Read Financial Statements

Pros and Cons of Using the Debt-to-EBITDA Ratio

There are both benefits and drawbacks to using debt-to-EBITDA ratio to assess the financial health of a business. Here’s how they stack up.

Pros

Debt-to-EBITDA is simple to calculate. Debt can be found on the balance sheet and EBITDA can be calculated from the income statement. As a result, this ratio can be a quick way to get a snapshot of a company’s financial health and liquidity.

The debt-to-EBITDA ratio is also popular with analysts because it relates the debts of a company to its business cash flow by ignoring non-cash expenses. This is important because, in the end, it’s cash, and not profits, that is needed to pay off debts.

Cons

Because EBITDA adds interest, taxes, depreciation, and amortization to net income, it may not provide an accurate measure of a firm’s actual earnings. If any of these variables are high, it could impact a company’s ability to pay debts.

In addition, debt-to-EBITDA may not be useful for comparing companies in different industries. Capital requirements vary by industry and, as a result, some companies need to carry a higher debt loan than others. For this reason, using debt-to-EBITDA to compare firms across industries may not be reliable.

Debt-To-EBITDA Ratio Example

Let’s look at an illustration of how the total debt-to-EBITDA ratio can indicate a company’s financial health (or lack thereof).

Calculation Example

Let’s say company ABC’s EBITDA is $10 million and its debts add up to $30 million. To calculate ABC’s debt-to-EBITDA ratio, you would calculate:

Debt-to-EBITDA = $30 million / $10 million

Debt-to-EBITDA = 3

A debt-to-EBITDA ratio of 3 is generally considered low and indicates that ABC has revenue to cover its debts. A lender may look at that ratio and decide ABC isn’t a risk and approve a loan.

Here’s another example: Let’s say company XYZ has an EBITDA of $10 million, but has $60 million in debt. This would be it’s ratio:

Debt-to-EBITDA = $60 million / $10 million

Debt-to-EBITDA = 6

Depending on the industry, a ratio of 6 may be considered high and could make it difficult for XYZ to get a good credit rating and qualify for any additional financing.

Recommended: A Guide to Ecommerce Business Loans

The Takeaway

The debt-to-EBITDA ratio reveals how much actual cash a company has available to cover its debt. It is one of many financial metrics used by lenders, analysts, and investors to gauge a company’s liquidity and financial health.

As a business owner, it can be a good idea to periodically calculate your company’s debt-to-EBITDA ratio. It can give you insights into your company’s current financial position and also help you see trends over time. If you see the ratio going down, for example, it means that you are paying down debt, the company’s earnings are going up, or both.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is considered a good debt-to-EBITDA?

A good debt-to-EBITDA ratio will depend on your industry. Generally, however, a ratio of three or less can indicate that your business has enough cash flow to comfortably cover its debts.

Is debt included in EBITDA?

Yes. EBITDA stands for earnings before interest, tax, depreciation, and amortization. Interest represents the interest your business is paying on its debts.

What does debt-to-EBITDA indicate?

The debt-to-EBITDA ratio indicates how much income you have available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

Photo credit: iStock/sanjeri

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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