Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.
If you are buying a small business with an SBA 7(a) loan, the number your lender will ask about first is your debt service coverage ratio, or DSCR. It is simple to define: the cash the business produces that is available to pay its loans, divided by the total yearly loan payments. A DSCR of 1.25x means the business throws off $1.25 for every $1.00 it owes the bank that year.
The short answer. For an initial acquisition of a business, SBA's current rules (SOP 50 10 8.1, effective October 1, 2026) set the minimum at 1.25 to 1, measured on the last fiscal year-end or the average of the last two, on a historical or adjusted basis. Projections still get reviewed, but they cannot be used to meet that minimum. Individual lenders often add their own requirements on top, so ask each lender what they use.
My view: 1.25x is a floor, not a target. After 17 years on the sell side, and after buying and running a small business myself, I believe it is prudent to treat 1.25x as the floor for an operating business. For a new buyer, clearing the minimum threshold is often necessary, but it may not be sufficient. A business that clears 1.25x on an annual basis can still have a very tight month, a slow season or a customer that pays late. If your deal only works at exactly 1.25x, there is no room for the ordinary surprises of the first year.
What goes into the calculation. Three things matter most:
- The earnings you can verify. Start with earnings you can tie to tax returns and bank statements, not the number on the listing. Test each add-back: is it real, is it discretionary, and does it tie to the books?
- A fair wage for the operator. If you will run the business, the cash available for debt should reflect paying someone to do that job.
- All the debt. Include the SBA loan and any seller note payments that are not on standby.
Look month by month, not just year by year. Annual DSCR can hide cash crunches. Lay out the cash by period through the first years of ownership so you see the tight spots before you sign, not after.
Try it on your own numbers.
- What can I afford to pay? works backward from SBA terms and your target coverage to the most a business can support.
- Add-back checker helps you test the earnings before you run coverage. Any adjustment you apply is yours to set from your own research.
- The free SBA Deal Screening Scorecard and Simple Acquisition Model show coverage and buyer cash period by period.
These tools are for analysis and education, not a buy or pass signal.
Frequently asked questions
What is the minimum DSCR for an SBA 7(a) business acquisition loan?
Under SOP 50 10 8.1 (effective October 1, 2026), initial acquisitions require at least 1.25 to 1 on historical or adjusted earnings. Lenders may require more.
Can projections be used to meet SBA's DSCR requirement?
For most acquisitions, no. Lenders must review projections, but the minimum must be met on historical results.
Is 1.25x DSCR a safe cushion?
Michael Keck considers it prudent to treat 1.25x as the floor for operating businesses. For a new buyer, clearing the minimum is often necessary but may not be sufficient, because a year that clears 1.25x can still include very tight months.
Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.