What debt service coverage does a 504 loan require?
Short answer
At least 1.15:1, calculated on the last fiscal year or the average of the last two. Source: SOP 50 10 8.1, Sec. C, Ch. 1, Para. E.1.d. If history falls short, the Certified Development Company (CDC) must analyze projections.
A 504 loan requires a debt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition ratio of at least 1.15:1 (SOP 50 10 8.1, Sec. C, Ch. 1, Para. E.1.d; Para. E begins p. 242). That matches the Standard 7(a) floor of 1.15:1.
How it is calculated
The ratio is operating cash flow, defined as earnings before interest, taxes, depreciation and amortizationPaying a loan down on a schedule, so each payment covers interest and part of the balance. Full definition (EBITDA), divided by combined debt service after the transaction. The CDC must assume interest-only payments on fully drawn lines of creditA credit limit you can draw on, repay and draw on again. .
The CDC must make prudent adjustments and prepare a global cash flow. Common adjustments are rent, unfunded capital expenditures, non-recurring income, distributions, S corporation tax distributions and owner compensation.
When history falls short
The CDC must analyze projections instead:
- At least 2 years of projections.
- Support for assumptions such as sales growth or expense cuts.
- A comparison to current industry trends.
- Proof of liquidity if repayment appears in Year 2 but not Year 1.
- An explanation of how interest and operations are paid during construction.
Income that does not count
- Outside income, such as a spouse's income, can offset personal expenses. It cannot be added to business cash flow (Para. E.1.g).
- Projected rent from the project property may appear in the global cash flow. It cannot be included in the repayment analysis.
Recent numbers
The application needs a balance sheet and income statement dated within 120 days before submission to SBA.
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