Why DSCR Matters for SBA 7(a) Loans
If you’re applying for an SBA 7(a) loan, you’ll quickly hear about DSCR (Debt Service Coverage Ratio). This financial metric tells lenders how well your business’s cash flow coverage stacks up against your total debt service.
DSCR = Net Operating Income (NOI) ÷ Total Debt Service
In plain English: For every $1 you owe in loan payments, how many dollars of income do you have available?
A DSCR below 1.0 means your business isn’t generating enough income to cover debts—something SBA lenders consider a red flag.
💡 Pro Tip: For more, check out the SBA’s guide on financial ratios and how they influence lending decisions.
SBA Guidance vs. Lender Standards
Does the SBA set a required DSCR?Not directly. SBA provides lending guidelines, but individual banks and approved lenders set their own thresholds. According to SBA’s 7(a) Loan Program overview, lenders must verify repayment ability, which is where DSCR comes in.
Most lenders want to see:
Minimum DSCR of 1.15× (bare minimum for many deals)
Preferred DSCR of 1.20×–1.25× (sweet spot for approvals)
Higher DSCR (1.35×+) often leads to better interest rates and more flexible terms
How to Calculate DSCR (With an Example)
Formula:DSCR = Net Operating Income (NOI) ÷ Total Debt Service
Net Operating Income (NOI): Your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA).
Total Debt Service: Annual principal and interest payments on all loans, including the new SBA 7(a) loan.
Example:If your NOI is $125,000 and your annual loan payments total $100,000:DSCR = 125,000 ÷ 100,000 = 1.25×
✅ This meets the typical SBA lender benchmark.
