The one number every SBA lender calculates first

By the AceTheSBA team

Before an underwriter reads your business plan, they divide one number by another. If the answer is too low, nothing else in the file matters. That number is your debt service coverage ratio (DSCR).

The formula

DSCR = cash flow available for debt service ÷ annual debt payments

Cash flow is generally EBITDA: net income plus interest, taxes, depreciation and amortization. Debt payments are a full year of principal and interest on all business debt, including the loan you are asking for.

The minimums under SOP 50 10 8.1

1.10 for 7(a) loans of $350,000 or less
1.15 for larger 7(a) loans and business expansions
1.25 for buying a business, measured on the seller’s historical results
1.0 globally, combining the business with the owners’ personal finances

A worked example

A bakery earned $62,000 last year. Add back $8,000 of interest and $21,000 of depreciation, and its EBITDA is $91,000. It already pays $14,400 a year on an equipment loan. The new $325,000 loan at 11.50% adds $54,832 a year. Total debt service: $69,232. DSCR: $91,000 ÷ $69,232 = 1.31. It clears the 1.10 minimum with room to spare.

The lender’s view

Many lenders want a cushion above SBA’s minimum, and every add-back must be supported by evidence. An adjustment the lender cannot justify does not count.

Your move this week

Take last year’s tax return, work out your EBITDA, and divide it by a year of payments on all your debt plus the new loan. If you land below 1.25, look at a longer term, a smaller loan or paying off expensive debt first.

Where do you stand?

The SBA Readiness Report estimates your repayment capacity from your revenue and margins, then shows where it stands against what lenders expect, along with the rest of your file. Six minutes, $19.99.

This week’s tool

Historical Cash Flow & Add-Back Workbook

Measures debt service coverage on actual results, with documented add-backs.

$39.00