DSCR (Debt Service Coverage Ratio)

Definition

Cash available for debt payments divided by the payments themselves.

Why It Matters

It is the test that turns an asking price into financeable or not, because the loan is sized to hold coverage above a line. For buying a business the SBA sets that line itself: 1.25x after a market owner salary, or 1.15x when an operating company buys another in its own industry group. It is measured on the last fiscal year or a two-year average, and on projections only for an owner-occupied special purpose property whose real estate fully secures the loan. Run it before you fall for a deal: if the price only clears the ratio by underpaying yourself, the business cannot actually carry the debt you would be signing for.

In numbers: A business producing $600k of cash flow against $400k of annual debt payments has a DSCR of 1.5x; at $500k of debt payments it drops to 1.2x, under the 1.25x floor the SBA sets for an outright purchase.