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.

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 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.

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