DSCR Loan Calculator
What is DSCR?
Debt Service Coverage Ratio (DSCR) reveals whether your target business generates enough cash flow to comfortably pay back all its debt including principal amount plus interest, which directly impacts your loan approval chances.
DSCR is calculated by dividing net operating income by debt service, where debt service represents both principal and interest payments. https://www.investopedia.com/terms/d/dscr.asp
Why does it matter?
One of the most important factors for banks and lenders to approve loans, other than credit history and economic conditions, is DSCR. DSCR directly measures a business's ability to generate enough cash flow to cover its debt obligations.
For SBA 7(a) financing, most lenders want a borrower to have a DSCR of 1.25x or more.
Therefore, a complete understanding of DSCR is crucial for acquisition entrepreneurs seeking financing for their business purchases.
SBA 7(a) Loan
SBA loans are considered a good option for first-time business searchers and entrepreneurs, and it is one of the most commonly used financing options by searchers because they offer more accessible terms for new searchers, such as lower down payments, longer repayment terms, and competitive interest rates, as compared to other financing option.
DSCR Loan Calculator
Use this DSCR calculator to determine if your acquisition target meets lender requirements:
DSCR Calculator
Calculate your Debt-Service Coverage Ratio instantly
✅ Minimum DSCR: 1.25 > Shows lenders that your business is financially stable enough to handle the loan payments.
✅ Preferred DSCR: 1.5+ Shows lenders that your business can survive tough times and still pay the loan.
Note: Meeting the minimum is good but optimizing your DSCR with other key financial metric can unlock even better financing options. Let’s take a closer look;
Other Key Acquisition Metrics for Searchers
Lenders don’t rely solely on DSCR when approving a loan; they also consider other key acquisition metrics before making a final decision. Let's briefly talk about some of the important ones.
🔹 Interest Coverage Ratio (ICR) → Both ratios quantify a business's ability to service debt. However, ICR focuses only on interest payments, while DSCR measures cash flow against both principal and interest repayments.
🔹 Gross Profit Margin (GPM) → GPM measures how efficiently a business converts revenue into profit after accounting for cost of goods sold, While DSCR assesses whether operational cash flow is sufficient to cover existing debt payment obligations.
🔹Seller's Discretionary Earnings (SDE) → SDE calculates the total financial benefit available to a potential business owner, Where DSCR specifically evaluates if current cash flow levels are adequate to service debt commitments.
Lenders do not evaluate DSCR in isolation. They use a combination of these metrics to make the final decision. A high DSCR does not ensure the borrower will approve the loan, if other factors indicate high risk.
Expert CPA Support for Acquisition Success
Our DSCR Calculator serves as a measure of your business's standing when it comes to facing debt obligations. To complement this tool, we at Prosolve CPA offer tailored DSCR analysis as well as advisory services to ETA searchers. Reach out to our team at Prosolve CPA today for a free consultation so that we can guide you every step of the way.
Frequently Asked Questions
Your common questions, our straightforward answers.
One of the most important factors for banks and lenders to approve loans, other than credit history and economic conditions, is Debt Service Coverage Ratio(DSCR).
Therefore, Complete Understanding of DSCR is crucial for acquisition Entrepreneurs seeking financing for their business purchases.
Why is DSCR so important for searchers?
DSCR Requirements Across Different Financing Options