What debt service coverage does a Standard 7(a) loan need?
Short answer
At least 1.15:1 on a historical or projected cash flow basis, and 1:1 on a global basis. That is the minimum in SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.a. Lender policies can be tighter.
At least 1.15:1, measured on historical or projected cash flow. SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.a (about p. 120) also requires 1:1 on a global basis.
What gets measured
Debt service means the future required principal and interest payments on all business debt, including the new SBA loan. The lender starts from 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) and must justify additions and subtractions. Examples are non-recurring income, owner's draw, S-Corp tax distributions and unfunded capital expenditures.
The SOP calls a current debt schedule, prepared by you and including shareholder debt, important to a complete analysis.
When history falls short
If the most recent full year and interim statements do not show enough coverage, the lender must get 2 years of detailed projections. The assumptions must justify relying on projections instead of history.
Start-ups and projections
- Start-ups and other projection-based applications must show at least 1.15:1 within 2 years of loan funding. On construction projects, that clock runs from the end of construction.
- Projected coverage may not count expected rental income from the project property. The global cash flow analysis may.
Other 7(a) paths
- 7(a) Small loans other than changes of ownership: 1.10:1 (Sec. B, Ch. 2, Para. C.2.a).
- Initial Acquisition and Owner Buyout deals: 1.25:1 (Appendix 15, Para. C.2.b).
- Business Expansion deals: 1.15:1 (Appendix 15, Para. C.2.b).
SBA's figure is a minimum, and lender policies vary.
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