What debt service coverage does an SBA acquisition need?
Short answer
1.25:1 for an Initial Acquisition, Owner Buyout, or employee stock ownership plan (ESOP) and Cooperative deal, and 1.15:1 for a Business Expansion. Global cash flow must also reach 1:1. Source: SOP 50 10 8.1, App. 15, Para. C.2.b.
Most acquisitions need 1.25:1. SOP 50 10 8.1, Appendix 15, Para. C.2.b, sets coverage by deal type:
- Initial Acquisition: 1.25:1
- Business Expansion: 1.15:1
- Owner Buyout: 1.25:1
- ESOP and Cooperative: 1.25:1
How it is measured
Coverage must be met on the last fiscal year-end, or on an average of the last two, on a historical or adjusted basis. Historical coverage is 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 deal. The lender may add back rent when owner-occupied commercial real estate is part of the sale.
A global cash flow analysis must also meet 1:1.
Projections do not qualify the loan
The lender must evaluate your post-closing projections but cannot rely on them to meet the ratio. The exception is an owner-occupied Special Purpose Property.
If the numbers fall short
You can add unlimited or limited equity to shrink the loan and its payment until coverage works.
SBA Express and 7(a) Small
No reduced ratio applies because a loan is small or Express (Section B, Ch. 2, Para. A.2). The 1.10:1 ratio for 7(a) Small loans excludes changes of ownership.
Ask lending partners about your loan
Tell us the amount you need and what it is for. We refer you to lenders that may fund businesses like yours, and it costs you nothing.
Janover Capital LLC is not a lender and is not the SBA. The lender makes the credit decision. A lender or marketplace may pay us a referral fee if we connect you, at no cost to you. Advertiser disclosure.