Question 1

What is DSCR and why does it matter for SBA loans?

Accepted Answer

DSCR (Debt Service Coverage Ratio) measures whether a business generates enough cash flow to cover its loan payments. DSCR = Annual Net Operating Income / Annual Debt Service. Most SBA lenders require a minimum DSCR of 1.25, meaning the business earns 25% more than needed to cover payments. Below 1.0 means the business can't cover its debt from operations alone.

Question 2

What SBA loan programs are available for buying a business?

Accepted Answer

The SBA 7(a) loan is the most common for business acquisitions — up to $5M, 10-year terms, and rates typically Prime + 2.75%. The SBA 504 loan is used for real estate and equipment. Both require as little as 10% down. Non-US citizens may face restrictions on SBA financing; check with an SBA-approved lender.

Question 3

How is a small business typically valued?

Accepted Answer

Most small businesses are valued using a multiple of SDE (Seller's Discretionary Earnings — profit before owner's compensation, taxes, depreciation, and amortization). Typical multiples are 2–4x SDE for businesses under $1M in earnings. Service businesses with recurring revenue or strong brand often command higher multiples.

Question 4

What is a good DSCR ratio for a business acquisition?

Accepted Answer

Lenders want 1.25+ DSCR. A DSCR of 1.5 or higher gives you a comfortable safety margin. Below 1.0 means the business won't cover its own loan payments from operations. If your DSCR is under 1.25, consider negotiating a lower purchase price, larger down payment, or seller financing.

Question 5

What's a typical down payment for buying a business with an SBA 7(a) loan?

Accepted Answer

SBA 7(a) loans typically require 10%–20% down for business acquisitions. With a $500,000 purchase price, you'd need $50,000–$100,000 in equity injection. Seller financing (where the seller holds a note for part of the price) can reduce your required down payment in some cases.

Question 6

What is cash-on-cash return in business acquisitions?

Accepted Answer

Cash-on-cash return measures annual cash flow relative to your initial cash investment. If you put $100,000 down and the business generates $25,000/year after all expenses and debt service, your cash-on-cash return is 25%. A target of 15–25%+ is typical for small business acquisitions.

Business Acquisition Calculator

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