What DSCR do SBA lenders want to see?

Most SBA 7(a) lenders look for a debt service coverage ratio of at least about 1.15x, measured after subtracting a salary for the new owner or a replacement manager. Each lender sets its own bar, so a deal near the floor needs a lender conversation early.

Why does the check use a 10.5% rate and a 10-year term?

SBA 7(a) rates are capped relative to the prime rate. At today's prime, Prime + 3 works out to about 10.5%, and business acquisition loans typically amortize over 10 years. Your actual rate is set by your lender and can be lower than the cap.

Does the Deal Pencil? The 60-Second Lender-Math Check

Q: What does it mean for a deal to pencil?

A deal pencils when the business's earnings can cover the loan payment with room to spare. Lenders measure that room as the debt service coverage ratio (DSCR): annual earnings divided by annual loan payments. SBA lenders typically want at least about 1.15x coverage.

A deal "pencils" when the business's earnings cover the loan payment with room to spare. Lenders measure that room as the debt service coverage ratio (DSCR) — annual earnings divided by annual loan payments — and SBA lenders typically want at least about 1.15×. Below that floor, the price, the down payment, or the structure has to change.

Asking price $ SDE (annual profit + owner's pay & perks) $ Down payment 10% The SBA minimum on a change of ownership is 10% down.

Enter the asking price and SDE from the listing to run the check. (JavaScript required — or read the worked math below.)

Rule-of-thumb math at SBA 7(a) terms: about 10.5% APR (the Prime + 3 cap at today's prime) on a 10-year note, coverage measured on the seller's stated SDE. A screen, not a lending decision.

What that check just did

Three steps, the same ones a loan officer runs on a napkin before anything else:

Sized the loan. Asking price minus your down payment. The SBA requires at least 10% down on a change of ownership.
Priced the payment. A 10-year amortization at about 10.5% APR — the SBA 7(a) rate cap of Prime + 3 at today's prime rate. Your lender's actual rate can be lower.
Measured the room. The seller's stated SDE divided by the annual loan payments. That's the coverage ratio, and about 1.15× is the floor most SBA lenders underwrite to.

If the deal clears the floor here, it's worth a real look. If it doesn't, you just saved yourself weeks — the listing needs a lower price, a bigger down payment, or seller financing before the lender math can work.

What this check deliberately leaves out

This is the optimistic version of the math, on purpose — it takes the seller's SDE at face value and looks at the business alone. A real lender goes further:

A salary for you or a manager. The lender subtracts a replacement salary from SDE before measuring coverage. That alone can pull a deal from "clears easily" to "misses the floor."
Your personal debt. The full underwrite is a global DSCR — the business's cash flow and your household's, combined. Your mortgage and car payments are part of the equation.
The add-backs. The SDE on the listing is the seller's claim. Inflated add-backs are the most common way a deal that pencils on paper falls apart in diligence.
Working capital and fees. The loan usually needs to cover more than the purchase price.

Scope runs the full version free. Drop in the listing and it reads the financials, verifies the add-backs, computes the global DSCR the way a lender will, and organizes it all into a lender-focused package. The first deal is on us — no credit card.

Analyze this deal free

Want more room to play with the numbers first? The free deal calculator adds revenue and a valuation read — still no account needed.

Keep going

The SBA loan reality checkWhat a 7(a) really takes — down payment, coverage, and the checks beyond the math. The buy-a-business checklistWhat to verify before the LOI, during diligence, and before you sign. Add-backs explainedThe seller's SDE is a claim. Here's how to verify it.

FAQ

What does "pencil" mean in business buying?

It's shorthand for "do the numbers work" — can the business's earnings cover the acquisition loan with enough margin that a lender will fund it and you can still pay yourself. If the math fails on the back of a pencil, no amount of diligence fixes it at that price.

Is 1.15× coverage a rule?

It's the floor most SBA lenders underwrite to, not a law. Each lender sets its own bar, and many want more cushion than the minimum. A deal sitting right at the floor is a conversation to have with a lender early, not a reason to walk on its own.

The deal clears the floor here — am I done?

No — this check takes the seller's SDE at face value. The next step is verifying that number against tax returns and bank statements, and running the coverage math the lender's way: after a replacement salary, with your personal debt included. That's the analysis Scope runs on every deal.

This is a rule-of-thumb screen on the figures you enter — not a certified appraisal, a lending decision, or financial advice. SBA terms and rate caps change; your lender is the authority on what your loan looks like. Verify with your CPA, lender, and attorney.