What DSCR do I need to qualify for an SBA loan?

The SBA sets a floor around 1.15x for standard 7(a) loans, but virtually no quality lender funds at that level. Plan for 1.25x as the practical minimum. Deals above 1.50x get fast-tracked.

How do I calculate DSCR for buying a business?

Start with the business's tax-return-verified earnings. Add defensible add-backs and subtract your buyer salary - that's your cash available for debt service. Divide by total annual debt payments (SBA loan principal and interest, plus any non-standby seller notes). The result is your DSCR.

Does the seller note count in DSCR?

Only if it's not on full standby. A seller note on full standby for the life of the SBA loan is excluded from the debt service denominator - it doesn't count against your DSCR. A seller note with active payments counts as debt service and compresses your ratio.

What happens if my DSCR is borderline?

Lenders stress-test borderline deals by increasing the interest rate 1-3% and modeling a 15-20% earnings decline. If your stressed DSCR falls below 1.0x, expect a decline. Your options: negotiate a lower price, bring more equity to reduce the loan amount, restructure seller financing onto full standby, or consider a fixed-rate loan to eliminate rate stress from the equation.

How long does a seller note need to be on standby?

If the seller note counts toward your equity injection, it must be on full standby for the entire life of the SBA loan - typically 10 years. How long the note needs to be on standby for a lender to exclude it from DSCR can vary by bank - usually two to three years minimum. If you're working with a specific lender, get that guidance upfront so you can structure your offer accordingly.

DSCR for SBA Loans: The 1.25x Rule Buyers Miss

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About the Author

Daniel Giles

Founder & CEO

Daniel Giles spent 18 months searching to acquire a business in Metro Atlanta - and learned the hard way how broken the system is in small business M&A. A Yale MBA, he navigated SBA financing, vetted providers, and survived two deals that collapsed in due diligence. He founded VerSquare to build the trust infrastructure for small business M&A - connecting provider reviews, loan data, and vetted professionals to bring real transparency and drive better deal outcomes.

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DSCR for SBA Acquisitions: What Every Buyer Needs to Know

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DSCR for SBA Acquisitions: What Every Buyer Needs to Know

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