Debt Service Coverage Ratio (DSCR) is adjusted annual cash flow divided by annual debt service (principal + interest). Most SBA 7(a) lenders require a minimum of 1.15× and many underwrite to 1.25×, the business must out-earn its loan payment by 15%, 25%.
Worked example
| Line | Amount |
|---|---|
| SDE | $350,000 |
| Less: owner salary reserve | −$90,000 |
| Cash flow for debt | $260,000 |
| Annual debt service (P&I) | $146,000 |
| DSCR = 260,000 ÷ 146,000 | 1.78× |
1.78× clears both bars comfortably. Test any deal in the DSCR calculator.
Why it matters when buying a business
DSCR is the lender's go/no-go. Below 1.15× and the loan is declined unless you restructure. The most powerful fix is a seller note on full standby, it carries no payments, so it stays out of debt service and lifts the ratio. A lower price or bigger equity injection works too.
