What is DSCR, and what does an SBA lender require?

DSCR is the cash a business produces divided by the loan payments it owes. A DSCR of 1.25 means the business generates $1.25 for every $1.00 of debt service. It is the single number that decides whether an acquisition can be financed.

The calculation

DSCR = cash flow available for debt service ÷ annual principal and interest. The numerator starts from normalised earnings — SDE on a small business — and then subtracts what is not yours to keep: a market wage for whoever runs the business (you, if that is you), capital spending the business genuinely needs, and taxes where the lender models them.

That subtraction is where deals quietly fail. A business with $180,000 of SDE against $132,000 of annual debt service looks like 1.36×. Take out $65,000 for the manager an absentee owner never paid, and it is 0.87× — under water.

What the rules actually say

SBA publishes its underwriting standards, so these are checkable rather than folklore:

Requirement	Level	Source
Standard 7(a) acquisition — loans from 1 October 2026	at least 1.25×	SOP 50 10 8.1, Appendix 15 (effective 1 October 2026)
Standard 7(a) acquisition — before that date	at least 1.15×	SOP 50 10 8, Section B, Ch. 1 (effective 1 June 2025)
7(a) Small loans, up to $350,000 — not available for an acquisition from 1 October 2026	at least 1.10×	SBA Procedural Notice 5000-876777 with SOP 50 10 8 (effective 1 March 2026)
Global basis, including personal obligations	at least 1.00×	SOP 50 10 8

The floor for buying a business rises on 1 October 2026. SOP 50 10 8.1 lifts standard 7(a) change-of-ownership coverage from 1.15× to 1.25× for initial acquisitions, owner buyouts and ESOP transactions, measured on the last fiscal year or an average of the last two — and the lender may no longer clear the bar with post-closing projections. Business expansions stay at 1.15×. Two consequences for a buyer: a deal that pencils at 1.18× today does not qualify under the new edition, and if your timeline crosses that date, the rulebook applied to your file is the one in force when your loan gets its SBA number — ask the lender which that will be.

The same edition closes the 7(a) Small route for acquisitions altogether. Appendix 15 opens by stating that “the use of 7(a) Small loans is not permitted for change of ownership transactions” — at any loan size. So the 1.10× floor above stops applying to buying a business on 1 October 2026: a purchase small enough to have been a 7(a) Small loan becomes a standard 7(a), underwritten to 1.25×. Chapter 2 of the same document puts it more mildly — such deals “cannot be financed using 7(a) Small standards and must be underwritten per the requirements outlined in Appendix 15” — but Appendix 15 states in its own opening that where the two conflict, the Appendix governs the change-of-ownership transaction.

A floor is not a target. Banks report being comfortable at about 1.25×, and the borrowers they actually approve average nearer 1.50× (Pepperdine Private Capital Markets Report 2026, Table 9). Arriving at 1.16× clears the rule on paper and still gets declined.

What moves it

Your salary. Lenders subtract the cost of replacing the owner's labour, whatever the seller's payroll shows.
Loan structure. Ten years instead of seven changes the payment, and the ratio, without changing the business at all.
Seller financing on standby. Payments deferred under SBA rules can lift coverage in the early years.
Working capital. A loan sized with nothing left over produces a business that services debt and cannot buy inventory.

Run the ratio before you fall in love with a deal. It costs nothing, and it is the fastest honest answer to "can this be bought at this price?"

Questions buyers ask

What DSCR does the SBA require?

It depends which edition of the rulebook your loan falls under. Through 30 September 2026, SOP 50 10 8 sets 1.15x for standard 7(a) acquisitions and 1.10x for small loans up to $350,000 under Procedural Notice 5000-876777. For loans from 1 October 2026, SOP 50 10 8.1 raises it to 1.25x on initial acquisitions, owner buyouts and ESOP deals, measured on historical results rather than projections; business expansions stay at 1.15x. The 1.10x small-loan floor stops applying to acquisitions on that date, because the new edition does not permit 7(a) Small loans for a change of ownership at all. Either way, at least 1.00x on a global basis including the borrower's personal obligations. Lenders commonly want more than the floor: banks report comfort around 1.25x and approved borrowers average nearer 1.50x (Pepperdine PCMR 2026, Table 9).

Does my own salary count against DSCR?

Yes. Lenders subtract a market wage for whoever operates the business — including you — before dividing by debt service. It is the most common reason a deal that looks financeable on the seller's numbers is not.

Sources

Seller's Discretionary Earnings (SDE) — SDE is what a small business earns for one full-time owner-operator: net profit before tax, plus that owner's pay and benefits, plus interest, depreciation and amortisation, plus expenses that will not exist after the sale.
Quality of Earnings (QoE) — A Quality of Earnings report is an accountant's deep check that the profit a seller reports is real, repeatable and properly earned.
Letter of Intent (LOI) — A letter of intent sets out the deal you and the seller believe you have agreed: price, structure, what is included, and how long you get to verify it.

Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →

Last updated: 2026-09-22