Debt Service Coverage Ratio (DSCR) Made Simple
DSCR (debt service coverage ratio) answers the lender’s most important question: Does the business make enough cash to pay all its debts, with room to spare?
The formula
DSCR = cash flow available for debt ÷ total annual debt payments
- Cash flow available: net profit plus add-backs like depreciation, amortization and interest on debt being refinanced.
- Annual debt payments: all loan, lease and card payments for the year, including the new loan.
Example
| Line | Amount |
|---|---|
| Net profit (from tax return) | $70,000 |
| + Depreciation | $12,000 |
| + Interest on debt being refinanced | $8,000 |
| Cash flow available | $90,000 |
| Existing debt payments (per year) | $18,000 |
| New SBA loan payments (per year) | $42,000 |
| Total debt payments | $60,000 |
| DSCR | 90,000 ÷ 60,000 = 1.50 |
A 1.50 DSCR means the business earns $1.50 for every $1.00 of debt payments. That’s healthy.
What lenders require
- Many lenders want at least 1.25x on most loans.
- Under the SBA’s October 2026 rules (SOP 50 10 8.1), the minimum is 1.25x for business acquisitions and owner buyouts and 1.15x for business expansions.
- Lenders may require more for riskier deals.
How much can you afford?
Turn the formula around: maximum annual debt payments = cash flow ÷ 1.25.
With $90,000 of cash flow: 90,000 ÷ 1.25 = $72,000 per year, or $6,000 per month in total debt payments. Subtract existing payments ($1,500 a month here) and the new loan payment should stay under about $4,500 a month. Test loan amounts in our calculator to stay under that line.
How to improve your DSCR
- Increase profit (pricing, cost control).
- Pay off or refinance expensive short-term debt.
- Borrow less, or choose a longer term to lower the payment.
- Make sure all real income is reported. See why taxes matter.
Frequently asked questions
What is a good DSCR for an SBA loan?
Many lenders want at least 1.25. Under the October 2026 SBA rules, acquisitions need 1.25 and expansions 1.15.
How do I calculate DSCR?
Divide cash flow available for debt by total annual debt payments, including the new loan.
How can I improve my DSCR?
Increase profit, pay off expensive short-term debt, borrow less or choose a longer term.
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Educational information, not legal or financial advice. We are not a lender and are not affiliated with the SBA. Disclaimer