DSCR Explained: Can Your Deal Get Financed?

What Is DSCR?

The Debt Service Coverage Ratio measures whether a business generates enough cash flow to cover its loan payments. It's the single most important number in acquisition financing.

DSCR = Available Cash Flow ÷ Annual Debt Service

A DSCR of 1.0× means the business generates exactly enough to cover debt payments — nothing left over. The SBA requires a minimum of 1.25× for 7(a) loans, meaning 25% cushion above debt service. Most conventional lenders want 1.35× or higher.

How to Calculate DSCR

Start with SDE, not EBITDA. In small business acquisitions, the buyer replaces the owner, so the calculation is:

1. Start with SDE (EBITDA + owner compensation add-backs)
2. Subtract replacement salary — what you'll pay yourself or a manager
3. Subtract estimated capex — annual maintenance capital expenditure
4. = Available cash flow (the numerator)
5. Calculate annual debt service — principal + interest on the acquisition loan (the denominator)
6. Divide — that's your DSCR

Example: $3.75M Deal

SDE: $1,220,000. Replacement salary: $190,000. Capex: $108,000. Available CF: $922,000. SBA loan (90% LTV): $3,375,000 at 6.5% over 10 years = $460,000 annual debt service. DSCR = $922K ÷ $460K = 2.00×. This deal gets financed.

What Changes After Due Diligence

Here's where it gets real. The DSCR above is based on CIM numbers. After due diligence, those numbers often change:

• SDE drops because bank statements reveal undisclosed owner distributions
• Debt service increases because of undisclosed obligations
• Capex estimates rise because equipment is older than represented

In the same deal, DD might reveal $167K in additional debt and $63K in undisclosed distributions. The DSCR drops from 2.00× to 1.86×. Still bankable — but the margin is thinner, and the bank will notice.

DSCR Thresholds

• Below 1.0× — The business can't cover debt payments. Deal is not financeable.
• 1.0× to 1.25× — Technically cash-flow positive but below SBA minimum. Needs restructuring.
• 1.25× to 1.50× — Meets SBA minimum. Bankable but tight. Any downturn puts you in covenant breach.
• 1.50× to 2.00× — Healthy. Room for operational hiccups. Bank is comfortable.
• Above 2.00× — Strong. You could potentially negotiate better terms.

Why SBA vs. Conventional Matters

SBA 7(a) loans allow 90% LTV up to $5M total loan amount. That means 10% down. Above $5M, you're looking at conventional lending: 75% LTV, 25% equity requirement, and typically higher DSCR thresholds (1.35×+). The SBA cap is the single biggest structural factor in deal financing for the lower middle market. This financeable ceiling is one of the two forces that set what your business is worth.

Calculate DSCR before you fall in love with a deal. Two minutes of math can save you six months of wasted diligence.

Test Your Deal

Want to run the numbers yourself? Use our free DSCR Calculator to see if your deal is bankable in under 60 seconds. Enter the SDE, asking price, and loan terms — the calculator auto-detects SBA vs. conventional structure and shows you exactly what the bank will see.

Or upload a CIM to JCoBee and get the full analysis automatically — DSCR, bankability, deal score, and structural intelligence — in under 2 minutes.