What Is Debt Service Coverage Ratio (DSCR) — And Why Do SBA Lenders Care?
If you’re applying for an SBA loan to buy a business, your lender is going to ask one critical question: Can this business generate enough cash to pay back the loan?
That’s exactly what Debt Service Coverage Ratio (DSCR) measures. It’s a simple ratio that compares how much cash a business produces versus how much it owes in loan payments each year.
Think of it this way: if a business generates $200,000 in cash flow and owes $150,000 in annual debt payments, there’s a $50,000 cushion. That cushion is what lenders want to see — because businesses hit bumps. Revenue dips. Unexpected expenses pop up. DSCR tells the lender there’s enough margin to absorb those shocks and still make payments on time.
A DSCR of 1.0x means the business generates exactly enough to cover its debt — no cushion at all. That’s a red flag for any lender. Most SBA lenders want to see at least 1.25x, meaning 25% more cash flow than what’s needed for debt payments.
The DSCR Formula (Simple Math)
Here’s the formula:
DSCR = Net Operating Income ÷ Annual Debt Service
Let’s break down each piece:
- Net Operating Income (NOI) — The business’s earnings before interest, taxes, depreciation, and amortization (EBITDA), sometimes adjusted for owner compensation. This is the cash the business actually generates from operations.
- Annual Debt Service — The total of all loan payments (principal + interest) due in a year. This includes your new SBA loan plus any existing debt the business carries.
The result tells you how many times over the business can cover its debt obligations. A DSCR of 1.50x means the business generates 1.5 times what it needs to make all loan payments.
What DSCR Do SBA Lenders Actually Require?
Here’s where it gets nuanced — and where most guides oversimplify things.
The standard benchmark is 1.25x. Most SBA 7(a) lenders use this as their minimum threshold. But the reality is more complex:
- Conservative lenders may require 1.30x–1.50x, especially for industries they consider higher risk (restaurants, retail, startups)
- Moderate lenders stick to the 1.25x standard for established businesses with clean financials
- Aggressive lenders may go as low as 1.15x or even 1.10x if other factors are strong — like significant collateral, a large down payment, or a buyer with deep industry experience
- SBA 504 loans (commercial real estate) often have stricter DSCR requirements, typically 1.25x–1.35x, because the loan amounts are larger and the assets are less liquid
The key takeaway: Not all lenders are the same. If one lender says your DSCR is too low, another lender with different risk tolerances might approve you. This is why working with a broker who has access to multiple lenders matters enormously.
Real DSCR Examples: Calculating DSCR for a Business Acquisition
Let’s walk through three realistic acquisition scenarios so you can see exactly how DSCR works in practice.
Example 1: Buying a Landscaping Company — Strong DSCR
- Purchase price: $800,000
- SBA loan amount: $720,000 (10% down payment)
- Loan terms: 10-year term, 10.5% interest rate
- Annual debt service: ~$117,000/year
- Business EBITDA (seller’s financials): $210,000
- Owner salary adjustment: Seller paid themselves $40K; you plan to take $80K → subtract $40K from EBITDA
- Adjusted NOI: $170,000
DSCR = $170,000 ÷ $117,000 = 1.45x ✅
This deal has strong coverage. Most lenders would be comfortable here. You have a 45% cushion above your debt payments.
Example 2: Acquiring a Small Restaurant — Borderline DSCR
- Purchase price: $500,000
- SBA loan amount: $450,000 (10% down)
- Loan terms: 10-year term, 11% interest rate
- Annual debt service: ~$78,000/year
- Business EBITDA: $120,000
- Adjusted NOI (after market-rate owner salary): $95,000
DSCR = $95,000 ÷ $78,000 = 1.22x ⚠️
This is below the standard 1.25x threshold. A conservative lender would decline this. But an aggressive lender — especially one experienced with restaurant acquisitions — might approve it if you have strong industry experience or additional collateral.
Example 3: Buying an E-Commerce Business — Below Threshold
- Purchase price: $1,200,000
- SBA loan amount: $1,080,000 (10% down)
- Loan terms: 10-year term, 10.75% interest rate
- Annual debt service: ~$180,000/year
- Adjusted NOI: $195,000
DSCR = $195,000 ÷ $180,000 = 1.08x ❌
This deal doesn’t pencil out as structured. But that doesn’t mean it’s dead — there are ways to restructure (more on that below).
How to Calculate DSCR When You’re Buying a Business
Calculating DSCR for an acquisition is different from calculating it for an existing business seeking a loan. Here’s the step-by-step process:
Step 1: Get the Business’s True Cash Flow
Start with the seller’s tax returns and financial statements (usually 3 years). Look at the business’s Seller’s Discretionary Earnings (SDE) or EBITDA. Most brokers provide a “recast” income statement that adds back the owner’s personal expenses run through the business.
Step 2: Adjust for Your Ownership
If the seller was paying themselves $50K but the market rate for a manager is $90K, you need to subtract that $40K difference. Be realistic — lenders will make this adjustment whether you do or not.
Step 3: Calculate Your Total Annual Debt Service
Include:
- Your new SBA loan payments (principal + interest)
- Any seller financing payments
- Existing business debt you’re assuming
- Equipment leases or other fixed obligations
Step 4: Run the Ratio
Divide your adjusted NOI by total annual debt service. If you’re at 1.25x or above, you’re in solid shape. If you’re between 1.15x and 1.25x, you have options. Below 1.10x, you’ll need to restructure the deal.
What If Your DSCR Is Below 1.25x? (Not All Hope Is Lost)
A DSCR below 1.25x doesn’t automatically kill your deal. Here’s what you need to know:
- Some lenders are more flexible. Lenders who specialize in certain industries or deal types may accept lower DSCR if they see strong compensating factors — like a buyer with 15 years of industry experience, significant personal assets, or a business with predictable recurring revenue.
- Projected DSCR matters. If the business is trending upward and your projections show DSCR improving to 1.30x+ within 12–18 months, some lenders will underwrite based on projected performance — not just historical numbers.
- Compensating factors can offset a weak DSCR:
- Strong personal credit (720+)
- Significant liquid assets or net worth
- Large down payment (20–30% instead of 10%)
- Additional collateral (real estate, equipment)
- Relevant industry experience
- Recession-resistant industry
The biggest mistake buyers make is going to one bank, getting told their DSCR is too low, and assuming the deal is dead. Different lenders have fundamentally different risk appetites. That’s exactly why working with a broker who knows which lenders are flexible on DSCR is a game-changer.
8 Ways to Improve Your DSCR (Or Structure Around It)
If your DSCR is coming up short, here are practical strategies to get your deal across the finish line:
1. Increase Your Down Payment
More money down = smaller loan = lower annual debt service = higher DSCR. Going from 10% to 20% down can dramatically shift the ratio. On a $1M deal, that’s $100K more down but could reduce annual debt service by $15K–$20K.
2. Negotiate a Lower Purchase Price
If the DSCR doesn’t work at the asking price, the business might be overpriced. Use DSCR as a negotiation tool with the seller: “The cash flow only supports a purchase price of $X.”
3. Include Seller Financing
Ask the seller to carry 10–20% of the purchase price as a seller note — ideally on a standby basis (interest-only or deferred payments for 2–3 years). Many SBA lenders allow standby seller notes, which reduces your immediate debt service and boosts DSCR.
4. Extend the Loan Term
A longer repayment period lowers annual payments. SBA 7(a) loans allow up to 10 years for business acquisitions and 25 years if real estate is included. If your deal includes property, structuring it as a 25-year loan instead of 10 can cut annual debt service nearly in half.
5. Identify Add-Backs the Seller Missed
Dig into the financials. Are there one-time expenses dragging down NOI? Did the seller expense personal travel, vehicles, or family members’ salaries? Proper recasting can legitimately boost NOI and improve your DSCR.
6. Present a Growth Plan
Some lenders will give weight to a well-documented business plan showing how you’ll increase revenue or cut costs post-acquisition. This is especially powerful if you have relevant experience and specific, actionable plans — not just “I’ll grow the business.”
7. Reduce Existing Business Debt
If the business has outstanding loans, lines of credit, or equipment leases, paying those off at closing (or having the seller pay them) removes them from the debt service calculation.
8. Find the Right Lender
This is the most underrated strategy. A lender who specializes in your industry or deal size may have more flexible DSCR requirements, use different NOI calculations, or weight compensating factors more heavily. The difference between approval and denial often comes down to finding the right lender — not changing the deal.
How GoSBA Helps You Navigate DSCR Requirements
At GoSBA, we work with 50+ SBA lenders — from large national banks to aggressive community lenders and credit unions. Each has different DSCR requirements, risk tolerances, and industry preferences.
Here’s how we help:
- We match you with the right lender. If your DSCR is 1.20x, we know which lenders will still look at your deal versus which ones won’t. No wasted time applying to banks that will say no.
- Free business plan and financial projections. We build your SBA-ready business plan and financial projections at no cost — a service that typically costs $2,500–$5,000 from consultants. These projections are specifically designed to present your DSCR in the strongest possible light while staying accurate and credible.
- Deal structuring expertise. We’ve helped fund $320M+ in SBA loans in 2025 alone. We know how to structure deals — seller notes, down payment optimization, term selection — to maximize your DSCR and get approvals.
- 100% free service. GoSBA is free for borrowers. We’re compensated by the lender, so you get expert SBA loan guidance without paying a dime.
Whether your DSCR is 1.50x and you need the best rate, or it’s 1.15x and you need a lender who’ll work with you, we’ve got the network and expertise to get your deal done.
Ready to Get Your SBA Loan?
Don’t let DSCR confusion hold you back from buying the business you want. Whether you’re still running numbers or ready to apply, our team can help you understand exactly where you stand and connect you with the right lender.
→ Get a free consultation with GoSBA today
We’ll review your deal, calculate your DSCR, build your business plan, and match you with lenders who fit your specific situation — all at no cost to you.
