DSCR Explained — The Number That Determines If Your Deal Gets Financed

DSCR — Debt Service Coverage Ratio — is the most important number in SBA small business acquisition financing. It determines whether your deal passes or fails the lender's underwriting test. Most first-time buyers discover their deal fails DSCR only after spending weeks in due diligence and thousands of dollars on advisors.

What DSCR Means

The SBA requires a minimum DSCR of 1.25x. The business must generate $1.25 in adjusted SDE for every $1.00 of annual loan payments. Anything below 1.25x fails.

Why 1.25x?

The 1.25x threshold gives the lender a 25% cushion. If the business has a bad year and SDE drops by 20%, a deal at 1.25x barely still covers loan payments. Experienced buyers typically look for 1.35x or higher. A deal at 1.26x means you have almost no margin for error.

How to Calculate DSCR Yourself

Step 1: Get your adjusted SDE — use your own calculation, not the seller's stated number.

Step 2: Calculate the SBA loan amount.

Step 3: Calculate the monthly payment using a loan calculator with these inputs:

• Loan amount: your SBA loan amount
• Interest rate: Prime + 2.75% (currently approximately 10.5–11%)
• Loan term: 10 years (120 months)

Step 4: Calculate DSCR.

Example: $100,000 SDE / $80,880 annual debt service = 1.24x — this deal FAILS.

What To Do When DSCR Fails

• Option 1: Negotiate the price down — lower purchase price means smaller SBA loan, lower debt service, better DSCR.
• Option 2: Increase the seller note — larger seller note means smaller SBA loan.
• Option 3: Bring more cash down — larger down payment reduces the SBA loan.
• Option 4: Walk away — a deal that cannot be structured to pass DSCR at a sensible price may simply be the wrong deal.

DSCR and Your Personal Safety Net

A deal at 1.25x DSCR means loan payments consume 80% of the business's SDE. Before closing, ask: if this business has a 15% revenue decline in year one — a completely plausible outcome during any ownership transition — can you still make your loan payment? If the answer is no, the deal is undercapitalized. MyDealCheck calculates DSCR automatically as part of the free score.