Guide · Updated
Will Your Deal Clear SBA DSCR? A Pre-LOI Gut Check
You are self-funding, which means the clock and the cash are both yours. The worst outcome is not losing a deal. It is spending three weeks and a few thousand dollars on diligence for a deal that was never financeable in the first place. One ratio tells you that on day one.
The number that decides financeability
Lenders do not fund a business because it is a good business. They fund it because the cash flow covers the loan with margin. That margin is the debt service coverage ratio, and for SBA 7(a) acquisition loans the floor is 1.25x under SOP 50 10 8.1. It is the first thing a credit committee looks at and the fastest thing you can check yourself.
The five-minute estimate
You need three inputs, and you can get all three from the CIM and a rate quote:
- Adjusted EBITDA, the lender's version. Not the broker's. Start from the tax return and only add back expenses you can document. In the sample deal the broker shows 1,690,000; the defensible figure is 1,425,330.
- Real maintenance capex. Subtract the capital spending the business actually needs to keep running, about 85,000 here. Ignoring capex is the most common way a DSCR estimate flatters a deal.
- Annual debt service. Amortize the loan over 10 years at the quoted rate. The sample 4,800,000 loan runs about 777,226 a year.
Divide cash available (1,340,330) by the debt service (777,226) and you get a DSCR of 1.72x in the sample deal, comfortably clear. The SBA DSCR calculator does this live, so you can slide the price until it breaks.
How to read the result
- Well above 1.25x: the deal has cushion. A soft quarter will not put you in default. This is where you want to be.
- Just above 1.25x: financeable on paper, fragile in practice. Model a downside before you commit. In the sample deal, revenue could fall and the DSCR would still be about 1.36x on a 20% earnings drop, which is the kind of cushion you are looking for.
- Below 1.25x: no lender funds it as structured. Either the price comes down, the seller note goes up, or you walk. Do not pay for diligence to confirm a no.
Why run it before the LOI, not after
DSCR is the one check that can kill a deal outright, and it costs nothing to run. Doing it first means your diligence budget and your weeks only go to deals that can actually close. When one clears, the quality of the add-backs is what determines whether the lender's EBITDA, and therefore the DSCR, holds up under scrutiny.
Frequently asked questions
What DSCR do SBA lenders require?
Under SBA SOP 50 10 8.1, in effect since October 1, 2026, a first-time acquisition needs a debt service coverage ratio of at least 1.25, meaning the business generates at least $1.25 of cash for every $1.00 of loan payments, measured on historical results rather than projections. Lenders can ask for more, so a ratio comfortably above 1.25 is far safer than one that just scrapes it.
How do I calculate DSCR for an acquisition?
Take adjusted EBITDA, subtract the capital expenditures the business genuinely needs, and divide by the annual debt service on the acquisition loan. The adjusted EBITDA must be the lender's version, built from the tax return, not the broker's inflated figure.
What is debt service?
Debt service is the total of principal and interest payments over a year. For an SBA 7(a) acquisition loan it is usually a ten-year amortization at a variable rate tied to prime, so the payment moves as rates move.
Can I improve a deal that just misses DSCR?
Sometimes. A larger seller note on standby, more buyer equity, or a lower price all reduce or reshape the debt service. But if a deal only clears after stretching every lever, it has no margin for a soft year, and that is the real warning.
Does the SBA DSCR use my salary?
Yes, indirectly. Lenders expect the business to cover the loan and a reasonable owner salary. If the deal only coverage works when you pay yourself nothing, it does not really clear.