DSCR & Loan Readiness
Understand your Debt Service Coverage Ratio and prepare your financial information for an SBA 7(a) loan.
What is DSCR?
DSCR (Debt Service Coverage Ratio) measures whether your business generates enough cash flow to cover your loan payments. It's a key metric lenders use to assess loan eligibility.
The formula: DSCR = Annual Cash Flow ÷ Annual Debt Payments
For SBA 7(a) loans, a DSCR of at least 1.1 is generally required. This means your business generates $1.10 in cash for every $1 of debt payments.
Expense Categories
Click on each category to see examples:
Classification Decision Order
Use this order to stay consistent and avoid double counting:
1. If the item is Sales income, classify as Revenue
2. If the item is Direct cost to produce or buy what is sold, classify as Cost of Goods Sold
3. If the item is Employee or contractor compensation, classify as Payroll
4. If the item is Occupancy lease for business space, classify as Rent
5. If the item is Normal recurring operating cost not above, classify as Other Operating Expenses
6. If the item is Principal, interest, depreciation, amortization, owner draws, personal expense, or income tax, classify as Exclude/Review
Why this matters: Lenders use these same classification rules to verify your numbers and calculate your official DSCR.