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Can this deal support a loan? See the coverage ratio lenders decide on.
Estimate whether a business's cash flow, after paying someone to run it, covers the loan payments with the cushion lenders look for.
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Business Calculators / Debt Service Coverage Calculator
Debt Service Coverage Calculator
Cash flow after a replacement salary, relative to the yearly loan payments.
What is DSCR?
DSCR = (Annual Cash Flow - Owner Replacement Salary) / Annual Debt Service. Lenders typically look for 1.25x or higher: after paying someone to run it, the business earns enough to cover the loan with a cushion to spare.For educational estimates only. Actual loan terms, rates and lender requirements vary. This is not a lending offer, an appraisal or financial advice.
Most buyers use some form of loan to make a deal happen, but not every business earns enough to cover its payments. That is what the debt service coverage ratio (DSCR) measures: how comfortably a business's earnings can carry its loan. Lenders lean on it heavily, and most want to see at least 1.25x before they will finance a deal.
Enter the asking price, the cash flow, a market salary for whoever runs the business and your loan assumptions to see whether the numbers work before you make an offer. EDGE advisors help buyers structure and finance acquisitions, so if the ratio is tight, talk to us before you walk away.
Questions
Debt Service Coverage Calculator: frequently asked questions
What is DSCR, and how is it calculated?
DSCR measures whether a business produces enough cash to cover its loan payments: annual cash flow / annual debt service. At 1.0x the business makes its payments with nothing to spare; at 1.5x it earns $1.50 for every $1.00 owed.
Why does it matter when buying a business?
Lenders treat it as the main yes or no signal on an acquisition loan, so it is one of the first numbers to run on any business you are considering.
What DSCR do lenders want?
Most SBA lenders look for at least 1.25x, and many prefer 1.5x or more for riskier industries or thinner records.
Why subtract an owner replacement salary?
Someone has to run the business, and that person must be paid before the loan. Subtracting a market salary keeps the test honest, whether you run it yourself or hire a manager.
What can I change to improve a deal's DSCR?
A lower price, a larger down payment, a longer term, a lower rate, or seller financing on standby all reduce the payments the cash flow has to cover.
Why is the lender's DSCR often lower than mine?
Lenders may reject some add-backs, use a different salary, or include other debts and the buyer's personal obligations. Use conservative inputs to stay close to what they will see.
What down payment and rate should I assume?
For an SBA loan, 10% to 20% down is common. Use a current SBA rate; an EDGE advisor can tell you what lenders are quoting now.
Does a high DSCR mean it is a good deal?
Not on its own. It means the debt is affordable. The business still has to be sound, priced fairly and a fit for you.
Is this a loan pre-approval?
No. It is an educational estimate. Actual loan terms and approvals depend on the lender, the business and the buyer.
Next Step
Put these numbers to work on a real deal.
Buyer's EDGE is free: save target businesses, model each deal in the Acquisition Center and learn the process in Acquisition Academy. Selling? The Seller Portal starts a confidential sale. Either way, an EDGE advisor can help from the first conversation through closing, financing included.