Lenders ask one question above all: can this business repay the loan? The debt service coverage ratio (DSCR) answers it.
The formula
DSCR = annual cash flow ÷ annual loan payments. A DSCR of 1.0 means cash flow exactly covers the payments. Above 1.0 means there is a cushion; below 1.0 means a shortfall.
What is a good number?
- 1.5 or more: comfortable
- 1.25 to 1.5: workable, with a modest cushion
- Below 1.25: tight, and many lenders will hesitate
Requirements differ by lender and industry, so treat these as rules of thumb.
How the Deal Check uses it
On each business listing we take the seller’s reported annual cash flow (SDE) and compare it with the yearly payments on a standard loan: 10% down, 9% interest, over 10 years. That gives a payment estimate and a coverage figure. You can change the down payment, rate and term to test your own scenario. A green Deal Check badge means coverage is at least 1.25 in our standard scenario.
Its limits
- It is an estimate, not a loan offer. Real terms depend on the lender.
- SDE includes the owner’s pay, so lenders may adjust it.
- Cash flow is reported by the seller unless marked verified.
Want to see what a business would cost to finance?
Every listing has a Deal Check with the monthly payment and whether cash flow covers it.
This article is general education, not financial, legal or tax advice. Talk to a qualified accountant and lawyer before you buy, sell or invest.