If you remember one number from the SBA loan process, make it DSCR — the Debt Service Coverage Ratio. It is the first metric most lenders calculate, and it often decides whether your application moves forward.
What it means
DSCR answers a simple question: for every $1 of loan payments, how many dollars of cash does the business generate?
DSCR = Annual net operating income ÷ Annual debt payments
A DSCR of 1.25 means the business earns $1.25 for each $1.00 it must pay — a 25% cushion. Below 1.0, the business cannot cover its payments from operations at all.
What lenders want to see
- 1.25x or higher — the standard for most SBA 7(a) loans, and now an explicit SOP requirement for acquisitions.
- 1.20x — sometimes accepted for 504 real estate loans with strong collateral.
- Below 1.15x — expect questions, additional collateral, or a decline.
How to improve yours
- Reduce existing debt before applying — paying down a truck loan can lift DSCR meaningfully.
- Document add-backs. One-time expenses and owner perks can legitimately be added back to cash flow.
- Borrow less or stretch the term. A smaller payment directly improves the ratio.
DSCR is calculated on historical cash flow, not projections. If your last 12 months don't support 1.25x, waiting and strengthening the numbers beats a rushed decline.