Calculate Debt Service Coverage

Debt Service Coverage Ratio (DSCR) measures whether a business produces enough cash flow to cover its loan payments. The formula is simple: annual cash flow ÷ annual debt service. A DSCR of 1.0× means the business generates exactly enough to make its payments — with nothing to spare. A DSCR of 1.50× means it generates $1.50 for every $1.00 of debt owed, leaving a 50% cushion. Lenders treat it as the primary go/no-go signal on an acquisition loan, so it's one of the first numbers business buyers run on any business they're considering.

When someone buys a business with a loan, the business itself has to generate enough money to pay that loan back — on top of paying the new owner. DSCR is the number that tells buyers (and lenders) whether it can.

For buyers, DSCR matters for two reasons. First, financing: SBA lenders use it as a pass/fail filter, so a deal that doesn't clear their threshold simply won't get funded. Second, downside protection: a healthy DSCR is a margin of safety. If revenue dips or a big customer leaves, a cushion above 1.0× is what keeps the business current on its loan while new ownership sorts things out. Running DSCR early saves buyers time, money, and heartburn on a deal that was never going to pencil out.

For sellers, DSCR may help determine if their business is priced too high for buyers banking on a loan.

The SBA's own guideline (SOP 50 10) sets a minimum global DSCR of 1.15×, but individual lenders almost always have their own, stricter targets. In practice, the market floor for acquisition deals is 1.25×, and preferred SBA lenders often want to see 1.35× or higher before they get comfortable. Here's a rough guide on how lenders read the number:

Below 1.15× - Rarely financeable without compensating factors
1.20×–1.25× - "Skinny" — approvable but little room for error
1.35×–1.50× - The sweet spot; healthy margin
Above 1.75× - Highly bankable; may earn better terms

Anything comfortably above 1.25× puts buyers in a better position, both to get approved and to be successful in the long-run.

Seller's Discretionary Earnings (SDE) includes the salary and perks the current owner takes out of the business. That's appropriate for valuation — but it overstates the cash actually available to repay a loan, because someone still has to run the business. Whether that's the new owner working full-time or a manager, that role has to be paid.

Lenders know this, so they subtract a reasonable replacement salary for an owner-operator from SDE before calculating DSCR. Our calculator does the same thing with the "Owner Replacement Salary" field: it deducts that figure from cash flow first, then measures what's left against the loan payments. This gives you a far more realistic picture of the deal, and it mirrors how an underwriter will actually score it. (One exception: if a business is verifiably absentee-run and won't require your day-to-day labor, that figure can be low or even zero.)

DSCR is driven by SDE on top and the debt payment on the bottom, so every lever works by lifting one or shrinking the other:

Increase the down payment. More equity means a smaller loan, smaller payments, and a higher DSCR. This is the fastest lever most buyers control.
Negotiate a lower purchase price. A lower price shrinks the loan directly — and often improves the return on investment at the same time.
Extend the loan term. A 15-year term instead of 10 lowers the monthly payment, though longer terms increase interest payments over time.
Lower the operator's comp. Only if the business genuinely needs little owner labor, and the lender can be convinced.
Use a standby seller note. Structuring part of the price as seller financing on full standby can reduce the bank debt the DSCR has to cover.
Grow the cash flow. Documented, sustainable improvements to revenue or margins lift the top of the ratio — though lenders underwrite historical numbers, not projections.

Play with these inputs in the calculator to see how each one moves your result.

This surprises a lot of first-time buyers. You might model a deal at 1.4× and have the lender come back at 0.9× on the same business. The gap usually comes down to how each side counts cash flow. Lenders calculate from federal tax returns, not the broker's adjusted P&L, and they're skeptical of aggressive add-backs. They'll also subtract a full replacement salary, and many use a weighted average of the last few years rather than the best trailing-twelve-month figure. The result is that a lender's "adjusted EBITDA" often runs 15–40% below the SDE in a listing. The takeaway: treat the calculator result as a directional screen, then confirm the real numbers with your lender and CPA.

Sellers "add back" expenses to inflate SDE — and lenders strip out anything that isn't documented or truly one-time. Because they work from tax returns, not an adjusted P&L, the lender's cash flow often lands 15–40% below the listing's SDE. Common add-backs lenders reject:

Undocumented personal expenses — cars, travel, memberships, no-show family payroll.
"One-time" costs that recur year after year.
Owner distributions dressed up as add-backs.
Ignored capex — the cash needed to replace aging equipment.

Standard DSCR looks only at the business: its cash flow against the new loan. Global DSCR looks at the whole picture — the business's cash flow plus the buyers other income, measured against the business debt plus the buyers personal debts (mortgage, car loans, credit cards). SBA lenders underwrite on the global number, which is why a strong business can still get tripped up by a buyer's heavy personal balance sheet.

The SBA's minimum equity injection is 10%, but most buyers put down 15%–25% on acquisition deals, and stronger down payments often unlock better rates. On rate, SBA 7(a) loans are typically variable and priced at WSJ Prime plus a spread, capped by SBA guidelines. When in doubt, run a couple of scenarios in the calculator to bracket your outcome.

Not by itself. DSCR tells you whether a business can service its debt — it doesn't tell you whether the price is fair or whether the revenue sustainable. A sky-high DSCR on a business in decline is still a risky buy. Use DSCR as one essential filter alongside valuation, customer concentration, lease terms, and the quality of the earnings.

No. This tool provides educational estimates only to help you screen deals quickly. Actual loan terms, rates, add-backs, and DSCR thresholds vary by lender, industry, and your personal financial profile — and lenders calculate from verified tax returns, not estimates. Always confirm a deal's financing with an SBA-preferred lender and your CPA before signing an LOI or committing capital.