A good DSCR, debt service coverage ratio, is 1.25× or higher, meaning the business throws off $1.25 of cash flow for every $1.00 of loan payment. SBA 7(a) lenders typically require a minimum of 1.15×, and strong deals often show 1.25× to 1.50×. DSCR is the number underwriters watch most, because it measures whether the business can actually afford the debt you're taking on to buy it.
How DSCR is calculated
DSCR is simply cash flow divided by debt payments:
DSCR = adjusted cash flow ÷ annual debt service
"Adjusted cash flow" usually starts from SDE (seller's discretionary earnings), then subtracts a reasonable owner's salary because you still have to pay yourself. "Debt service" is the total of principal and interest on all loans for the year.
| Line | Amount |
|---|---|
| Adjusted cash flow (SDE less owner salary) | $130,000 |
| Annual debt service (P&I) | $100,000 |
| DSCR | 1.30× |
1.30× clears the typical 1.15× floor with room to spare, the kind of cushion that survives a slow quarter.
What counts as good, borderline, and too low
- 1.50×+, very strong; comfortable margin and easier approval.
- 1.25×, 1.49×, good; the target most buyers aim for.
- 1.15×, 1.24×, approvable but tight; little room for error.
- Below 1.15×, usually declined or must be restructured.
How to improve a weak DSCR
If a deal comes in short, you have levers before walking away: negotiate a lower price, add a seller note on standby to shrink the bank loan, extend the amortization, or increase your down payment. Read the mechanics in our DSCR explained guide, then test any scenario with the DSCR calculator.
Frequently asked questions
1.25× or higher is considered good. SBA lenders typically require a minimum of 1.15×, and strong deals show 1.25× to 1.50×.
Divide adjusted cash flow (SDE less an owner's salary) by total annual debt service. $130,000 of cash flow over $100,000 of payments is a 1.30× DSCR.
Below the lender's floor (often 1.15×) the loan is declined or restructured. Lower the price, add a standby seller note, extend the term, or put more down.
