How to calculate DSCR for an SBA loan
The DSCR formula, a worked example and SBA minimums under SOP 50 10 8.1: 1.10 for 7(a) Small loans, 1.15 standard 7(a), 1.25 for business purchases.
Published · 8 min read · By the AceTheSBA team
Key points
- DSCR = cash flow available for debt service ÷ total annual debt payments. For SBA loans, cash flow is EBITDA with adjustments the lender can justify, and debt payments include the new SBA loan.
- SBA minimums under SOP 50 10 8.1: 1.10 for 7(a) Small loans ($350,000 or less), 1.15 for standard 7(a) loans and business expansions, 1.25 for initial acquisitions and owner buyouts, and 1.0 global.
- A DSCR of 1.25 means the business earns $1.25 for every $1.00 of loan payments.
- Business purchases must meet coverage on the seller's historical results, not on projections.
Debt service coverage ratio (DSCR) is the number an SBA lender looks at first. It answers one question: does this business generate enough cash to pay its loans, including the one it is asking for?
The formula
DSCR = cash flow available for debt service ÷ annual debt service
- Cash flow available for debt service: for SBA loans this is operating cash flow, generally EBITDA (net income plus interest, taxes, depreciation and amortization), with adjustments the lender can justify.
- Annual debt service: the required principal and interest payments over the next year on all business debt, including the new SBA loan.
A DSCR of 1.00 means every dollar of cash flow goes to loan payments. A DSCR of 1.25 leaves 25 cents of cushion on every dollar.
SBA minimums under SOP 50 10 8.1
| Loan type | Minimum DSCR | Basis |
|---|---|---|
| 7(a) Small loan ($350,000 or less), not a business purchase | 1.10 | Last year-end, year-end plus interim, or 12-month projections reaching 1.10 within one year |
| Standard 7(a) loan (over $350,000) | 1.15 | Historical and/or projected; projections must reach 1.15 within two years |
| Business expansion (buying another business in the same industry group) | 1.15 | Historical: last fiscal year or average of the last two |
| Initial acquisition, owner buyout, ESOP or cooperative | 1.25 | Historical: last fiscal year or average of the last two |
| Global (business plus guarantors) | 1.0 | Combined cash flow and obligations |
Lenders can require more than these minimums, and many do.
A worked example
A bakery wants a $325,000 7(a) loan over 10 years. Its last full year:
| Line | Amount |
|---|---|
| Net income | $62,000 |
| + Interest | $8,000 |
| + Depreciation and amortization | $21,000 |
| + Taxes (where deducted) | $0 |
| EBITDA | $91,000 |
Its existing equipment loan costs $14,400 a year. At an interest rate of 11.50% (Prime of 7.00% plus SBA’s maximum 4.5% for loans of $250,001 to $350,000), the new loan’s payment is about $4,569 a month, or $54,832 a year.
- Annual debt service: $14,400 + $54,832 = $69,232
- DSCR: $91,000 ÷ $69,232 = 1.31
At $325,000 this is a 7(a) Small loan, so the minimum is 1.10. At 1.31 the bakery passes, with room to spare. If it were buying a business instead, 1.25 would apply, and 1.31 would still pass.
You can check a payment like this with the SBA loan calculator.
Add-backs: what lenders accept
SOP 50 10 8.1 allows the lender to add back or subtract items when it can explain why each is supported by ongoing operations. Examples include:
- Non-recurring expenses or income (a one-time legal settlement, a lawsuit win)
- Owner’s draw or distributions, and S-Corp tax distributions
- Rent, when the loan buys the property the business has been renting
- In a business purchase, the seller’s discretionary expenses and compensation, and savings the new owner will realize
Every add-back needs evidence. If you add back owner compensation, the lender must also show through global cash flow that the owner can still cover personal obligations and living expenses at 1:1. An add-back the lender cannot support does not count.
Buying a business: historical results only
For an initial acquisition or business expansion, coverage must be met on the seller’s historical results: the last fiscal year-end or the average of the last two. The lender reviews your post-closing projections, but cannot rely on them to meet the ratio. The only exception is buying an owner-occupied special-purpose property integral to the business, where projections must reach the ratio within two years.
Interest-only seller debt that is not on full standby must be amortized over no more than 10 years in the calculation, so it counts as if it were being repaid.
How to improve a low DSCR
- Lengthen the term. Real estate can run up to 25 years; equipment generally 10.
- Borrow less. Put in more equity or trim the use of funds.
- Refinance or pay off other debt that is costing more than it should.
- Document legitimate add-backs with general ledger detail and invoices.
- Wait for a stronger year to appear on your filed tax return, which is what the lender verifies.
This article reflects SBA SOP 50 10 8.1, effective October 1, 2026. Payments assume the Wall Street Journal Prime rate of 7.00% (October 2026).