Glossary
Debt service coverage ratio (DSCR)
Operating cash flow divided by total debt payments, including the loan you are asking for. It is the first calculation an underwriter runs, and the most common reason a business loan is declined.
Debt service coverage ratio (DSCR): Operating cash flow divided by total debt payments, including the loan you are asking for. It is the first calculation an underwriter runs, and the most common reason a business loan is declined.
Why it matters
DSCR is the question “can this business actually afford this payment?” expressed as a number. A DSCR of 1.25 means the business generates $1.25 of cash for every $1.00 of debt payment. Below 1.00 means it does not generate enough.
Credit score gets the attention, but coverage does the deciding. The SBA sets no minimum credit score at all, and it does set minimum coverage — see what the SBA actually requires.
The thresholds that actually apply
| Context | Minimum |
|---|---|
| SBA 7(a) Small Loan (term loans of $350,000 or less, other than changes of ownership) | 1.10:1, historical or projected |
| Standard SBA 7(a) | 1.15:1 historical and/or projected, plus 1:1 global |
| Typical bank commercial lending | Commonly 1.20x to 1.25x, set by the lender |
| As an ongoing covenant | Often 1.15x or 1.25x, tested quarterly |
How it is calculated
Operating cash flow divided by debt service. The SBA defines operating cash flow as EBITDA — earnings before interest, taxes, depreciation and amortization — with permitted adjustments, and debt service as the future principal and interest on all business debt including the new loan.
- Add-backs matter. Depreciation, interest, and genuinely discretionary owner expenses are typically added back. A business that looks marginal on its tax return often covers comfortably once add-backs are counted — but you must be able to document each one.
- Global coverage brings your personal income and obligations into the picture, which is why the SBA applies a 1:1 global test on standard 7(a).
- All debt counts, including equipment loans, cards carrying a balance, and any advance with daily or weekly debits.
The two levers when you are short
- Borrow less. The fastest fix, and the one borrowers resist. A smaller loan clears the same test on the same cash flow.
- Lengthen the term. A longer amortization lowers the annual payment and raises coverage — at the cost of more total interest. Do not extend past the useful life of whatever you are buying.
Retiring an existing high-payment debt also works, and occasionally refinancing one into the new facility solves the problem outright. Run your own numbers in the affordability calculator before you apply, because this is the test you are most likely to fail.