LOANOLOGY

RATIOS & CASH FLOW

Financial ratios are essential for securing an SBA loan to start or grow your small business or franchise. These metrics demonstrate to lenders that your business generates sufficient cash flow to repay the loan, whether launching a new venture or acquiring an existing operation. Below, we outline the critical ratios and how LoanBox guides you through the process.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a pivotal factor in SBA loan approval, assessing your business’s ability to cover debt obligations with available cash flow.

Calculation:
Annual EBITDA ÷ Annual Debt Service = DSCR

  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) represents net operating income after expenses, excluding taxes and interest.

  • Annual Debt Service includes principal and interest payments on the proposed loan and existing debts.

  • Example: A business with $150,000 in EBITDA and a loan requiring $80,000 in annual payments yields a DSCR of $150,000 ÷ $80,000 = 1.88.

Significance: The SBA requires a minimum DSCR of 1.15 (per SOP 50 10 8), meaning your cash flow must cover debt payments at least 1.15 times. Lenders may prefer higher thresholds, such as 1.25 or 1.50, particularly for startups or acquisitions.

Startups vs. Acquisitions:

  • Startups: Rely on financial projections, necessitating a robust business plan.

  • Acquisitions: Use the combined EBITDA of the buyer and seller, providing more flexibility for established operations.

Maximum Loan Amount

The DSCR directly influences the maximum loan amount your business can borrow, providing clarity on your financing capacity.

Calculation:
EBITDA ÷ Required DSCR = Maximum Annual Debt Service

  • This figure is converted into a loan amount based on the loan term and interest rate.

  • Example: A business with $200,000 in EBITDA and a lender requiring a 1.25 DSCR can support $200,000 ÷ 1.25 = $160,000/year in debt service, equating to approximately $1.2 million over 10 years at 8% interest.

Startups vs. Existing Businesses:

  • Startups: Depend on projections, with DSCRs of 1.15–1.50 shaping loan size.

  • Acquisitions/Existing Businesses: Higher EBITDA supports larger loans, often with DSCRs of 1.50–1.75.

Loan-to-Value (LTV)

The Loan-to-Value (LTV) ratio compares the loan amount to the appraised value of assets securing it, a key consideration for acquisitions or real estate-focused loans.

Calculation:
Loan Amount ÷ Appraised Value of Assets = LTV

  • For acquisitions, the LTV is based on the combined value of the buyer’s and seller’s businesses.

  • Example: A $900,000 loan to purchase a $1 million business results in an LTV of $900,000 ÷ $1,000,000 = 90%.

SBA vs. Conventional:

  • SBA Loans: Many lenders set an internal LTV cap at 90%, often allowing up to 100% financing for acquisitions.

  • Conventional Loans: More restrictive, with LTV limits of 75–85%, frequently requiring down payments or seller financing.

Acquisition Considerations: If the buyer’s business is valued at less than 11% of the seller’s, SBA loans are often necessary to meet LTV requirements, as conventional loans may exceed their 33% threshold.

Debt-to-Income Ratio (DTI)

The Debt-to-Income Ratio (DTI) evaluates your personal financial capacity to manage both personal and business debts.

Calculation:
Personal Annual Debt Service ÷ Total Personal Income = DTI

  • Debt Service includes personal loans, mortgages, and credit card payments.

  • Example: With $30,000 in annual personal debt payments and $100,000 in income, DTI = $30,000 ÷ $100,000 = 30%.

SBA Standard: Lenders typically seek a DTI below 30–40%, though some apply DSCR methods to personal cash flow.

Net Worth

While no specific net worth-to-loan ratio exists, your net worth significantly influences lender confidence.

Components: Includes retirement accounts, home equity, investments, and other assets.

Impact:

  • High Net Worth: Enhances credibility, reducing perceived risk for startups and potentially waiving down payment requirements.

  • Low Net Worth: May lead to down payments or increased scrutiny, even if not formally mandated.

Leveraging Cash Flow for Growth and Stability

How DSCR Impacts Approval

Your business’s cash flow, as reflected in the DSCR, is central to SBA loan approval, especially for acquisitions or expansions. Lenders focus on your ability to generate sufficient cash to cover debt obligations, and SBA loans offer advantageous terms to maximize borrowing potential.

SBA Advantages:

  • Requires a minimum DSCR of 1.15 (per SOP 50 10 8), with lender benchmarks often at 1.25 or 1.50.

  • Supports LTV ratios up to 90%, enabling loans of $5–$7 million, ideal for acquiring an existing business or expanding operations.

  • Example: A business with $300,000 in combined EBITDA and a 1.15 DSCR can secure a $2.6 million loan, compared to $2 million at a 1.50 DSCR with a conventional lender—a 30% increase in borrowing capacity.

Conventional Lenders: Typically require higher DSCRs (1.50–1.75) and lower LTVs (75–85%), limiting loans to $1.7 million for the same EBITDA at a 1.75 DSCR—a 52% reduction compared to SBA’s 1.15.

Impact: SBA’s lenient DSCR and LTV standards provide greater access to capital, facilitating significant growth or acquisition opportunities compared to conventional financing constraints.

LoanBox Loanology provides independent insights into small business lending based on what we know can be accomplished with most LoanBox lenders. However, there may be some policy, perspective, or viewpoint we share which may not reflect those of all lenders on our platform, as each brings unique policies. LoanBox lenders brings diverse policies and perspectives so not all lenders will be able to assist or even agree with all of the tips, strategies, articles, guides, and insights we provide for small business owner borrowers. Lenders are not responsible, liable or obligated for the content or advice provided in Loanology or on LoanBox.com. For specific guidance, use the search bar or just contact us directly and speak to a LoanBox Advisor.