Debt service coverage ratio (DSCR) is the number every SBA 7(a) lender checks before approving a business acquisition loan. It answers one question: does the business generate enough cash to comfortably make the loan payment?
The formula
DSCR = SDE ÷ Annual Debt Service
Annual debt service is the total yearly principal-and-interest payment on the acquisition loan, based on the loan amount, the SBA note rate, and the term (typically 10 years for a business acquisition, sometimes longer if real estate is included).
What counts as a good DSCR
Most SBA 7(a) lenders want to see a DSCR of at least 1.25x — meaning the business generates 25% more cash than the loan payment requires, leaving a cushion. Below that, many lenders won't approve the loan at all, or will require a larger down payment or seller note to compensate.
As-stated vs. stressed DSCR
This is the distinction that trips up most first-time buyers. As-stated DSCR uses the SDE figure exactly as reported on the listing — the seller's own characterization of cash flow, add-backs included. Stressed DSCR applies a haircut to that SDE before running the same calculation, to account for the possibility that reported earnings don't fully hold up under a buyer's actual operation of the business.
A deal can look comfortably fundable at as-stated DSCR and fail the moment a more conservative, stressed number is applied. Bizvetting applies a standardized 20% haircut to SDE across every listing before calculating stressed DSCR — the same treatment for every deal in the batch, so grades are comparable to each other rather than dependent on how aggressively each individual seller characterized their own earnings.
A business reports $200,000 SDE against $60,000 in annual debt service — a 3.33x as-stated DSCR. Apply a 20% stress haircut ($160,000 stressed SDE) against the same debt service, and stressed DSCR drops to 2.67x. Still comfortably above 1.25x — this deal holds up under stress. A thinner deal might not.
Why this matters more than the multiple
A low SDE multiple can still be a bad deal if the DSCR doesn't clear, once real financing terms are applied. Multiple tells you what you're paying; DSCR tells you whether the business can actually carry what you're paying. Screen on DSCR first.
Every listing on Bizvetting shows both — as-stated and stressed DSCR, side by side, plus the price move needed to clear a 1.25x stressed threshold.
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