What is the Required Debt Service Coverage Ratio (DSCR) for SBA 7(a) Loans?
Debt service coverage ratio, or DSCR, is one of the most important factors lenders look at when approving a loan. DSCR is calculated by dividing a business’s net operating income by their total debt service. For SBA 7(a) financing , most lenders want a borrower to have a DSCR of 1.25x or more.
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Debt service coverage ratio, or DSCR, is one of the most important factors lenders look at when approving a loan. DSCR is calculated by dividing a business’s net operating income by their total debt service. For SBA 7(a) financing, most lenders want a borrower to have a DSCR of 1.25x or more.
How The DSCR Formula Works in Practice
In order to better understand how DSCR works, let’s look at some numbers. For example, if a business has $1 million of net operating income (NOI), and an annual debt service of $750,000, they would have a DSCR of 1.33x.
$1 million/$750,000 = 1.33x DSCR
That 1.33x DSCR is slightly above most lenders’ minimum requirement of 1.25x, so, if the borrower were otherwise eligible for an SBA 7(a) loan, their DSCR would not typically be a limiting factor.
DSCR Calculator
6 Tips on How to Improve DSCR
Increase revenues: This can be done by expanding the customer base, increasing prices, or introducing new products or services.
Reduce expenses: A company can look for ways to cut costs, such as negotiating lower prices for supplies, reducing overhead, or streamlining operations.
Pay down debt: Paying off existing debt will reduce the amount of debt the company has to service and improve the DSCR.
Refinance debt: If the company is unable to pay off its existing debt, it may be able to refinance it at a lower interest rate, which will reduce the amount of money needed to service the debt and improve the DSCR.
Increase the time period over which debt is repaid: Extending the repayment period will reduce the amount of money needed to service the debt each month, improving the DSCR.
Increase equity: A company can improve its DSCR by increasing the amount of equity it has relative to debt. This can be done by retaining earnings, issuing new stock, or selling assets.
DSCR is Especially Important for Commercial Real Estate Loans
While DSCR is important for all kinds of SBA 7(a) loans, it’s particularly important for SBA 7(a) loans for commercial real estate. Some lenders may even offer eligible borrowers 100% financing for commercial real estate with the 7(a) loan. However, this requires great credit, strong financials, and a high DSCR, among other factors.