Financing & debt coverage

Build the capital stack and see the number a lender will calculate before you walk into the bank.

DSCR
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Capital stack

Live
$
$
$
$
$
Buyer equity
15%
3.5%
Bank / SBA debt
%
Seller note
10%
%
Other costs
2.0%

The stack

Bank / SBA loan—
Seller note—
Buyer equity—
Purchase price—

Annual debt service

Cash available (CFADS)—
Bank / SBA payment—
Seller note payment—
Total debt service—
Surplus after debt—
Total debt to SDE—

Loan term comparison

Same loan, different amortization
TermMonthly paymentAnnual debt service DSCRTotal interestBuyer cash flowCash-on-cash
A longer term raises coverage and cash flow today at the cost of more total interest. A shorter term builds equity faster but leaves less room for a bad year.

Rate sensitivity

Most SBA 7(a) loans float over prime

Amortization schedule

Combined bank and seller debt
YearPaymentsInterestPrincipalBalanceEquity built
Full deal model Maximum price at this structure
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Debt service coverage ratio explained

DSCR is the ratio a lender uses to decide whether a business can repay a loan out of its own operations. It divides the cash available for debt service by the annual payments on that debt. At 1.00× the business covers its loan exactly and nothing more. At 1.25× — the standard SBA minimum — there is 25% more cash than the loan requires.

CFADS = SDE − Owner/manager salary − Maintenance capex DSCR = CFADS ÷ Annual debt service

The detail that trips up most first-time buyers is the owner salary. A lender will not let you count the money you need to live on as money available to repay them. If the business produces $300,000 of SDE and you need $95,000 to support your household, only the remainder services debt.

The standard acquisition capital stack

  • Buyer equity — 10% to 25%. SBA 7(a) requires a minimum 10% equity injection for a change of ownership, and up to half of that can sometimes come from a seller note on full standby.
  • Bank or SBA loan — 60% to 80%. Typically 10 years for a business without real estate, or up to 25 years when real estate is included. Most 7(a) loans carry a variable rate set over prime.
  • Seller note — 5% to 25%. Usually cheaper than bank debt, and it keeps the seller financially invested in a clean transition. Lenders often require it to be on standby, meaning no payments for the first year or two.
  • Earnout — 0% to 20%. Contingent on performance you have not yet verified. It is not day-one cash and should not be counted as such.

What lenders check beyond DSCR

  • Historical coverage — the business must have cleared the threshold on past tax returns, not just in projections
  • Personal guarantee — SBA loans are personally guaranteed, and typically collateralized by any real estate you own
  • Industry experience — relevant management experience materially affects approval
  • Global cash flow — your household income and existing obligations are reviewed alongside the business
  • Business valuation — an independent appraisal is required when the loan exceeds $250,000

How to fix a DSCR that will not clear

If coverage lands below 1.25×, there are only four levers, and price is the most powerful of them:

  1. Lower the price. Less debt, directly. Use the Offer Optimizer to find the price that clears your target.
  2. Put more cash in. Raises coverage but lowers your return on equity.
  3. Shift debt to the seller. A larger note at a lower rate — especially on standby — reduces year-one payments.
  4. Lengthen the term. Lowers the annual payment; increases total interest paid.

What you should not do is assume growth that has not happened yet. Lenders underwrite the business you are buying, not the one you intend to build.

What DSCR do SBA lenders require?
A minimum of 1.15×–1.25× is typical, evaluated on both historical and projected cash flow. Many lenders want to see 1.25× historically before they will consider projections at all.
Can the seller note count toward my down payment?
Under SBA rules a seller note can count toward the equity injection only if it is on full standby for the life of the loan. Standby terms vary by lender, so confirm before you structure around it.
Should I take a 10-year or 25-year loan?
The 25-year term is only available when the loan includes commercial real estate. For a business-only acquisition, 10 years is standard. The comparison table shows what each term costs you in total interest.
What happens if rates rise on a variable loan?
Your payment increases and your coverage falls. The rate sensitivity chart shows how far your DSCR moves per point of rate increase — if a 2-point move pushes you under 1.00×, the structure is too tight.

More: Dashboard · Deal Analyzer · Valuation · Scenarios · Offer Optimizer · Market Data · Deal Memo · Mortgage amortization · All calculators

Estimates for educational purposes only, not financial, tax, or legal advice. SBA program rules change — confirm current terms with a lender.