Jason Fan

May 24, 2024

Debt Service Ratio Calculator for SBA Backed Acquisition Loans

Jason Fan

May 24, 2024

When it comes to securing an SBA loan to acquire a business, understanding your Debt Service Coverage Ratio (DSCR) is key. Simply put, DSCR measures your business's ability to cover its debt obligations with its current income. Think of it as a financial fitness test for your business: the higher the score, the better. Lenders use this ratio to gauge the risk of lending to you. If your DSCR is too low, it might be a red flag that you might struggle to make loan payments after your acquire the business. Our handy DSCR calculator can help you quickly figure out where you stand, making the loan process a bit less daunting.

The Formula for DSCR

Calculating your DSCR is straightforward once you know the formula:

Here's a quick breakdown:

  • Net Operating Income (NOI): This is your business's revenue minus its operating expenses (excluding taxes and interest).

  • Total Debt Service: This includes all the principal and interest payments on your business's debts for a given period, typically a year.

For example, if your business has a net operating income of $200,000 and your total debt service is $150,000, your DSCR would be:

This means you have $1.33 of income for every $1.00 of debt payment, indicating a decent buffer for covering your debt.

Minimum Acceptable DSCR for an Acquisition Loan

When it comes to SBA acquisition loans, lenders typically look for a DSCR of at least 1.15 for smaller loans and 1.25+ for larger loans. This ratio means your business generates 15-25% more income than is needed to cover its debt payments. It shows lenders that your business has a cushion to handle its debt, making it a less risky investment.

Here’s why this matters: A DSCR below 1.0 means your business isn’t generating enough income to cover its debt obligations, which could lead to cash flow problems. On the other hand, a DSCR above 1.25 is considered healthy and signals to lenders that your business is financially stable and capable of managing its debt responsibly.

How to Improve DSCR

There are several ways to improve the DSCR of a deal even if the underlying business doesn't change:

  1. Inject more cash into the deal: The bigger the down payment you put towards the loan, the less you'll have to borrow and the lower your Total Debt Service. If you have the capital and if rates are low, putting more down is a great way to make your deal more attractive to lenders, get better rates, and save in the long-term.

  2. Increase your sellers note: As of August 1, 2023, a new SOP from the SBA made it possible to have seller debt count towards the 10% equity injection required by the SBA. This is a great way to finance the deal with minimal down payment, but can also improve your DSCR as increasing the sellers note amount will lower your Total Debt Service.

  3. Negotiate a lower purchase price: All else being equal, a lower purchase price means less total debt, which will reduce your Total Debt Service.

When it comes to securing an SBA loan to acquire a business, understanding your Debt Service Coverage Ratio (DSCR) is key. Simply put, DSCR measures your business's ability to cover its debt obligations with its current income. Think of it as a financial fitness test for your business: the higher the score, the better. Lenders use this ratio to gauge the risk of lending to you. If your DSCR is too low, it might be a red flag that you might struggle to make loan payments after your acquire the business. Our handy DSCR calculator can help you quickly figure out where you stand, making the loan process a bit less daunting.

The Formula for DSCR

Calculating your DSCR is straightforward once you know the formula:

Here's a quick breakdown:

  • Net Operating Income (NOI): This is your business's revenue minus its operating expenses (excluding taxes and interest).

  • Total Debt Service: This includes all the principal and interest payments on your business's debts for a given period, typically a year.

For example, if your business has a net operating income of $200,000 and your total debt service is $150,000, your DSCR would be:

This means you have $1.33 of income for every $1.00 of debt payment, indicating a decent buffer for covering your debt.

Minimum Acceptable DSCR for an Acquisition Loan

When it comes to SBA acquisition loans, lenders typically look for a DSCR of at least 1.15 for smaller loans and 1.25+ for larger loans. This ratio means your business generates 15-25% more income than is needed to cover its debt payments. It shows lenders that your business has a cushion to handle its debt, making it a less risky investment.

Here’s why this matters: A DSCR below 1.0 means your business isn’t generating enough income to cover its debt obligations, which could lead to cash flow problems. On the other hand, a DSCR above 1.25 is considered healthy and signals to lenders that your business is financially stable and capable of managing its debt responsibly.

How to Improve DSCR

There are several ways to improve the DSCR of a deal even if the underlying business doesn't change:

  1. Inject more cash into the deal: The bigger the down payment you put towards the loan, the less you'll have to borrow and the lower your Total Debt Service. If you have the capital and if rates are low, putting more down is a great way to make your deal more attractive to lenders, get better rates, and save in the long-term.

  2. Increase your sellers note: As of August 1, 2023, a new SOP from the SBA made it possible to have seller debt count towards the 10% equity injection required by the SBA. This is a great way to finance the deal with minimal down payment, but can also improve your DSCR as increasing the sellers note amount will lower your Total Debt Service.

  3. Negotiate a lower purchase price: All else being equal, a lower purchase price means less total debt, which will reduce your Total Debt Service.

Debt Service Ratio Calculator for SBA Backed Acquisition Loans

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.