DSCR (debt-service coverage ratio) is a business's cash flow divided by its annual loan payments — and it's the single number that decides whether an acquisition can be financed at its asking price. Lenders typically require at least 1.25×, and underwrite comfortably from 1.5×: every $1 of debt service should be covered by $1.50 of cash flow.
The formula, worked
DSCR = annual cash flow available for debt service ÷ annual debt service (principal + interest)
Take a deal at $850,000 with $250,000 SDE, financed 90% with an SBA 7(a)-style loan ($765,000, ~11%, 10 years): debt service runs about $126,000/year. A buyer paying themselves $80,000 leaves ~$170,000 for the bank:
DSCR = $170,000 ÷ $126,000 = 1.35× — financeable, but thin. One bad quarter and coverage breaks.
Note what isn't in the numerator: the buyer's salary. Skipping that adjustment is the most common DSCR mistake — the bank will make it even if you don't.
What different DSCRs mean at the deal table
| DSCR | Read |
|---|---|
| Below 1.0× | Cash flow doesn't cover payments — not financeable |
| 1.0–1.25× | Below most lenders' floor; needs more equity or a lower price |
| 1.25–1.5× | Financeable with scrutiny; flagged as thin in the engine |
| Above 1.5× | Comfortable — the deal finances itself with margin |
DSCR is also a pricing tool in reverse: if a typical buyer at typical leverage can't clear 1.25× at the asking price, the price usually has to come down to clear the market. In our review of a $1.3M car-hauling listing, $400K of cash flow produced a DSCR of 2.07× at full SBA leverage — part of why a full asking multiple can still be a fair deal: it finances easily.
Three levers when coverage is thin
- Structure — a seller note on standby (interest-only, subordinated) lowers year-one debt service; common in SBA deals. (SBA 7(a) vs conventional.)
- Equity — more down payment, lower debt service. Brutal but effective.
- Price — DSCR math is the most objective renegotiation argument that exists: "at this price, no lender funds it."
The free calculator computes DSCR from your market's financing presets automatically and flags coverage below 1.5× and 1.25× — score any live listing and check the financing panel before falling in love with the multiple.