Glossary

DSCR — Debt-Service Coverage Ratio

The ratio of business cash flow to annual debt service. SBA 7(a) lenders typically require 1.15–1.25 for acquisition loans.

What it is

DSCR = Business cash flow available for debt service / Annual debt service.

"Business cash flow available for debt service" is typically the reconstructed SDE (or EBITDA for larger businesses) less a replacement owner salary, less taxes, and less any capex reserves the lender requires.

"Annual debt service" is the total of principal + interest payments on the proposed loan over a year.

What it tells the lender

DSCR tells the lender how much cushion the business has between its cash flow and its loan payments. A DSCR of 1.0 means the business generates exactly enough cash to cover its debt service — no margin for error. A DSCR of 1.25 means the business generates 25% more cash than its debt service requires — a reasonable cushion for most small businesses.

• DSCR < 1.0: The business cannot cover its debt service from operations. Loan will be denied.
• DSCR 1.0–1.15: Thin cushion. Most SBA 7(a) lenders will decline or require additional collateral.
• DSCR 1.15–1.25: Minimum acceptable range for most SBA 7(a) acquisition loans.
• DSCR > 1.25: Comfortable cushion. Better shot at approval and potentially better terms.
• DSCR > 1.5: Strong cushion. Lender-friendly; some industries (hospitality, healthcare) typically require this.

How to improve DSCR

• Increase buyer equity injection. Smaller loan = smaller debt service = higher DSCR.
• Extend amortization. 25-year amortization (if real estate is included) reduces annual debt service vs. 10-year.
• Negotiate seller financing on standby. A seller note on standby during the SBA loan term doesn't count against DSCR.
• Challenge add-backs that reduce SDE. Every dollar of legitimate add-back that the lender accepts increases cash flow and DSCR.

New York-specific notes

• NYS labor costs (workers' comp, statutory disability, PFL, UI) are real operating expenses that reduce DSCR — model them conservatively.
• NYC taxes (Business Corporation Tax, UBT, CRT where applicable) reduce DSCR for NYC businesses.
• For seasonal businesses (tourism, landscaping, car washes), lenders may compute DSCR on a trailing 12-month basis but stress-test against the worst months — verify how your lender will compute it.

Where to go next

• Affordability calculator — computes DSCR for your target
• SDE definition
• EBITDA definition
• SDE vs EBITDA guide + calculator