October 13, 2026
Are You Ready for a Loan?
Barrier 2: Not Enough Cash Flow (The DSCR Problem)
Why This Barrier Trips Up So Many Borrowers
Even if your credit is strong, your loan can still be denied for one simple reason: the business does not make enough money to comfortably pay back the loan.
This is the second most common reason business loans get turned down. In the 2025 Federal Reserve Small Business Credit Survey, 33 percent of borrowers who were denied or only partially funded said "insufficient cash flow" was the reason (Crestmont Capital / SBCS 2025). The Kansas City Fed's Q3 2025 lending survey went even further — 71 percent of banks said "borrower financials" were the top reason they turned down loan requests (Kansas City Fed Small Business Lending Survey).
In plain English: banks are not worried about your dream. They are worried about your math.
What Lenders Are Really Asking
When a lender looks at your business, they are asking one simple question:
If the answer is "yes, with room to spare," the loan probably gets approved. If the answer is "just barely" or "only if everything goes perfectly," the loan usually gets denied.
Lenders do not want to be paid back "just barely." They want a cushion — because things go wrong. A customer pays late. A refrigerator breaks. Gas prices spike. Sales slow down for a month. The cushion is what keeps the loan payment coming in when life happens.
The Number That Decides Everything: DSCR
Lenders measure that cushion with one number. It is called the Debt Service Coverage Ratio, or DSCR for short.
Here is what it means, in the simplest possible terms:
DSCR = (Money left over each year) ÷ (Loan payments each year)
That's it. If the top number is bigger than the bottom number, you have a cushion. If the top number is smaller, you don't.
An Example You Can Actually Picture
Imagine you want to open a small coffee shop.
• After paying for coffee beans, rent, employees, utilities, and everything else, your business has
$60,000 left over at the end of the year.
• The loan you want to take out would cost $48,000 per year in payments (that's $4,000 a month for 10 years).
Your DSCR is:
$60,000 ÷ $48,000 = 1.25
That means for every $1.00 you owe the bank, you have $1.25 available to pay it. You would be paying the loan and still have 25 cents on the dollar left over.
The 1.25 Rule
Most SBA lenders will not approve a loan unless your DSCR is at least 1.25 — sometimes higher (SBA7a.loans). Some banks want to see 1.35 or even 1.50 for riskier industries like restaurants, hotels, or startups.
Here is what different DSCR numbers mean to a lender:
Barrier 2: Not Enough Cash Flow (The DSCR Problem)
Why This Barrier Trips Up So Many Borrowers
Even if your credit is strong, your loan can still be denied for one simple reason: the business does not make enough money to comfortably pay back the loan.
This is the second most common reason business loans get turned down. In the 2025 Federal Reserve Small Business Credit Survey, 33 percent of borrowers who were denied or only partially funded said "insufficient cash flow" was the reason (Crestmont Capital / SBCS 2025). The Kansas City Fed's Q3 2025 lending survey went even further — 71 percent of banks said "borrower financials" were the top reason they turned down loan requests (Kansas City Fed Small Business Lending Survey).
In plain English: banks are not worried about your dream. They are worried about your math.
What Lenders Are Really Asking
When a lender looks at your business, they are asking one simple question:
After the business pays all its bills, does it have enough money left over to also pay the loan?
That is it. That is the whole test.If the answer is "yes, with room to spare," the loan probably gets approved. If the answer is "just barely" or "only if everything goes perfectly," the loan usually gets denied.
Lenders do not want to be paid back "just barely." They want a cushion — because things go wrong. A customer pays late. A refrigerator breaks. Gas prices spike. Sales slow down for a month. The cushion is what keeps the loan payment coming in when life happens.
The Number That Decides Everything: DSCR
Lenders measure that cushion with one number. It is called the Debt Service Coverage Ratio, or DSCR for short.
Here is what it means, in the simplest possible terms:
DSCR = (Money left over each year) ÷ (Loan payments each year)
That's it. If the top number is bigger than the bottom number, you have a cushion. If the top number is smaller, you don't.
An Example You Can Actually Picture
Imagine you want to open a small coffee shop.
• After paying for coffee beans, rent, employees, utilities, and everything else, your business has
$60,000 left over at the end of the year.
• The loan you want to take out would cost $48,000 per year in payments (that's $4,000 a month for 10 years).
Your DSCR is:
$60,000 ÷ $48,000 = 1.25
That means for every $1.00 you owe the bank, you have $1.25 available to pay it. You would be paying the loan and still have 25 cents on the dollar left over.
The 1.25 Rule
Most SBA lenders will not approve a loan unless your DSCR is at least 1.25 — sometimes higher (SBA7a.loans). Some banks want to see 1.35 or even 1.50 for riskier industries like restaurants, hotels, or startups.
Here is what different DSCR numbers mean to a lender:
If your DSCR is below 1.25, applying is usually a waste of time. The application will bounce.
Figuring Out the "Money Left Over" Number
Now let's break down the top of the DSCR fraction — the "money left over" number. Bankers call it Net Operating Income or sometimes EBITDA (pronounced "ee-bit-dah"). It sounds fancy, but it's not.
Start with your net income — what your business tax return says you made after all expenses. Then add back a few things that don't actually use cash:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Why do we add those back?
• Interest — the interest on your current loans gets added back because the DSCR is measuring your ability to pay new debt.
• Taxes — added back because they are paid out of profit, not before it.
• Depreciation and amortization — these are accounting entries, not real cash going out the door. Your truck loses value on paper, but no money leaves your bank account for depreciation.
For a business the owner is buying (an acquisition), lenders will also add back the owner's salary and any personal expenses that ran through the business — things like the seller's car, phone, or health insurance. This is called owner's discretionary earnings or seller's discretionary earnings (SDE). It shows what the business really produces before the owner decides how to pay themselves.
A Simple Walk-Through
Let's use a real-world example. You are buying a landscaping business. The seller's tax return shows:
Figuring Out the "Money Left Over" Number
Now let's break down the top of the DSCR fraction — the "money left over" number. Bankers call it Net Operating Income or sometimes EBITDA (pronounced "ee-bit-dah"). It sounds fancy, but it's not.
Start with your net income — what your business tax return says you made after all expenses. Then add back a few things that don't actually use cash:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Why do we add those back?
• Interest — the interest on your current loans gets added back because the DSCR is measuring your ability to pay new debt.
• Taxes — added back because they are paid out of profit, not before it.
• Depreciation and amortization — these are accounting entries, not real cash going out the door. Your truck loses value on paper, but no money leaves your bank account for depreciation.
For a business the owner is buying (an acquisition), lenders will also add back the owner's salary and any personal expenses that ran through the business — things like the seller's car, phone, or health insurance. This is called owner's discretionary earnings or seller's discretionary earnings (SDE). It shows what the business really produces before the owner decides how to pay themselves.
A Simple Walk-Through
Let's use a real-world example. You are buying a landscaping business. The seller's tax return shows:
Now say the SBA loan to buy this business would cost $110,000 per year in payments.
DSCR = $152,000 ÷ $110,000 = 1.38
That works. You have a real chance at approval.
But if the loan payment were $140,000 per year:
DSCR = $152,000 ÷ $140,000 = 1.09
That does not work. Denied.
Do The Math Yourself, Before The Bank Does
The single biggest mistake borrowers make is applying without calculating their own DSCR first. They walk into a bank, drop off financials, and hope. Two weeks later, they get a denial letter and cannot figure out what went wrong.
Do not do that.
Before you set foot in a lender's office:
1. Pull together your last 2 to 3 years of tax returns and profit -and-loss statements.
2. Calculate your EBITDA or SDE for each year (using the formula above).
3. Ask the lender or use an online SBA calculator to figure out what your annual loan payment would be at the amount you want to borrow.
4. Divide EBITDA by the loan payment.
5. If the number is below 1.25, do not submit the application. Fix the problem first.
If you can't do this calculation yourself, ask your accountant, your SBDC counselor, or your bookkeeper. This is basic math, and every serious borrower should be able to explain their own DSCR number.
What To Do If Your DSCR Is Too Low
If you run the numbers and your DSCR comes in below 1.25, don't give up. You have four practical ways to fix it.
1. Borrow Less Money
The simplest fix is to ask for a smaller loan. A smaller loan means a smaller payment, which means a bigger cushion.
Example: If a $500,000 loan gives you a DSCR of 1.10, try running the numbers on $400,000. Cut the request until the DSCR clears 1.25. You may not get everything you wanted, but you will get something — and something is better than nothing.
The other option is to make up the difference with more of your own money (a bigger down payment) or with a seller carrying part of the note.
2. Stretch The Loan Over More Years
The longer the loan term, the smaller each monthly payment. That means a bigger cushion and a higher DSCR.
Example: A $500,000 loan at 10 percent over 7 years costs about $8,300 a month. That same loan stretched to 10 years costs about $6,600 a month. Same loan, same rate — but the monthly payment drops by $1,700, which can be the difference between denial and approval.
SBA loans allow long terms:
• Up to 10 years for equipment or business acquisition
• Up to 25 years for real estate
• 7 to 10 years for working capital
If you match the loan term to what the money is being used for, your DSCR usually looks much healthier.
3. Show Add-Backs
Sometimes the business actually produces more cash than the tax return shows. Common add-backs:
• One-time expenses that will not repeat (a lawsuit settlement, a big equipment repair, hurricane damage)
• The previous owner's salary if you are buying the business and will pay yourself less
• Personal expenses the old owner ran through the business (family cell phones, personal vehicles)
• Rent paid to the owner that was above market rate
Add-backs must be documented. You cannot just claim them — you need proof. Canceled checks, invoices, tax records, or a written explanation from the CPA. Lenders will accept add-backs that are well documented and reject the ones that aren't.
4. Wait One or Two Quarters
If your business is growing but the trailing 12 months don't quite show a strong DSCR yet, sometimes the best move is to wait 3 to 6 months. Keep growing revenue, keep controlling expenses, then reapply with updated financials.
A bank cares far more about the last 12 months than about last year. Six months of strong growth can move your DSCR from 1.15 to 1.35 without changing anything else.
Stress Test Your Own Deal
Here is a move that instantly makes you look more sophisticated than 90 percent of the borrowers walking into a bank: stress test your own numbers.
That means: don't just show what happens if everything goes according to plan. Show what happens ifthings get worse.
Run three versions of your projections:
• Best case: Everything goes right. Revenue hits target.
• Base case: Realistic. Revenue is what you honestly expect.
• Downside case: Revenue is 10 to 20 percent below plan. Costs are 5 percent higher.
Then calculate DSCR for each case.
DSCR = $152,000 ÷ $110,000 = 1.38
That works. You have a real chance at approval.
But if the loan payment were $140,000 per year:
DSCR = $152,000 ÷ $140,000 = 1.09
That does not work. Denied.
Do The Math Yourself, Before The Bank Does
The single biggest mistake borrowers make is applying without calculating their own DSCR first. They walk into a bank, drop off financials, and hope. Two weeks later, they get a denial letter and cannot figure out what went wrong.
Do not do that.
Before you set foot in a lender's office:
1. Pull together your last 2 to 3 years of tax returns and profit -and-loss statements.
2. Calculate your EBITDA or SDE for each year (using the formula above).
3. Ask the lender or use an online SBA calculator to figure out what your annual loan payment would be at the amount you want to borrow.
4. Divide EBITDA by the loan payment.
5. If the number is below 1.25, do not submit the application. Fix the problem first.
If you can't do this calculation yourself, ask your accountant, your SBDC counselor, or your bookkeeper. This is basic math, and every serious borrower should be able to explain their own DSCR number.
What To Do If Your DSCR Is Too Low
If you run the numbers and your DSCR comes in below 1.25, don't give up. You have four practical ways to fix it.
1. Borrow Less Money
The simplest fix is to ask for a smaller loan. A smaller loan means a smaller payment, which means a bigger cushion.
Example: If a $500,000 loan gives you a DSCR of 1.10, try running the numbers on $400,000. Cut the request until the DSCR clears 1.25. You may not get everything you wanted, but you will get something — and something is better than nothing.
The other option is to make up the difference with more of your own money (a bigger down payment) or with a seller carrying part of the note.
2. Stretch The Loan Over More Years
The longer the loan term, the smaller each monthly payment. That means a bigger cushion and a higher DSCR.
Example: A $500,000 loan at 10 percent over 7 years costs about $8,300 a month. That same loan stretched to 10 years costs about $6,600 a month. Same loan, same rate — but the monthly payment drops by $1,700, which can be the difference between denial and approval.
SBA loans allow long terms:
• Up to 10 years for equipment or business acquisition
• Up to 25 years for real estate
• 7 to 10 years for working capital
If you match the loan term to what the money is being used for, your DSCR usually looks much healthier.
3. Show Add-Backs
Sometimes the business actually produces more cash than the tax return shows. Common add-backs:
• One-time expenses that will not repeat (a lawsuit settlement, a big equipment repair, hurricane damage)
• The previous owner's salary if you are buying the business and will pay yourself less
• Personal expenses the old owner ran through the business (family cell phones, personal vehicles)
• Rent paid to the owner that was above market rate
Add-backs must be documented. You cannot just claim them — you need proof. Canceled checks, invoices, tax records, or a written explanation from the CPA. Lenders will accept add-backs that are well documented and reject the ones that aren't.
4. Wait One or Two Quarters
If your business is growing but the trailing 12 months don't quite show a strong DSCR yet, sometimes the best move is to wait 3 to 6 months. Keep growing revenue, keep controlling expenses, then reapply with updated financials.
A bank cares far more about the last 12 months than about last year. Six months of strong growth can move your DSCR from 1.15 to 1.35 without changing anything else.
Stress Test Your Own Deal
Here is a move that instantly makes you look more sophisticated than 90 percent of the borrowers walking into a bank: stress test your own numbers.
That means: don't just show what happens if everything goes according to plan. Show what happens ifthings get worse.
Run three versions of your projections:
• Best case: Everything goes right. Revenue hits target.
• Base case: Realistic. Revenue is what you honestly expect.
• Downside case: Revenue is 10 to 20 percent below plan. Costs are 5 percent higher.
Then calculate DSCR for each case.
Example:
The downside case shows your DSCR would drop below 1.25 if revenue fell 15 percent. That's not a bad thing to admit — in fact, showing you thought about it makes the lender trust you more.
Lenders respect borrowers who know their weak spots and have a plan. They do not trust borrowers who insist "nothing bad will ever happen."
Match The Loan Term to What You're Buying
One of the fastest ways to blow up your DSCR is to finance the wrong thing on the wrong term.
Rule of thumb: The loan term should match the useful life of what you are buying.
Lenders respect borrowers who know their weak spots and have a plan. They do not trust borrowers who insist "nothing bad will ever happen."
Match The Loan Term to What You're Buying
One of the fastest ways to blow up your DSCR is to finance the wrong thing on the wrong term.
Rule of thumb: The loan term should match the useful life of what you are buying.
Why this matters: If you buy a $600,000 building on a 7-year loan instead of a 25-year loan, your monthly payment more than triples. That crushes your DSCR — and the lender will notice.
The building lasts 50 years. Financing it over 25 years matches its life. Financing it over 7 years creates an artificial cash crunch that makes an otherwise good deal look terrible on paper.
Ask your lender to structure the loan the right way from the beginning. Do not accept a short term just because that's what the lender first offered.
Special Note: Startups
Startups face a unique problem — they don't have any history to show. There is no tax return to prove EBITDA.
If you are starting a brand-new business, lenders will look at:
1. Your projections — but they will discount them. Be conservative. Show monthly detail for Year
2. Comparable businesses — Vertical IQ, IBISWorld, RMA Annual Statement Studies. If similar coffee shops in similar towns typically do $400,000 in revenue, don't project $900,000.
3. Signed contracts or letters of intent — anything that proves revenue is real, not hoped for.
4. Your experience — a 15-year restaurant manager opening a restaurant is a very different risk than a first-time operator.
For a startup, most SBA lenders require projected DSCR of 1.15 or higher in Year 1 and 1.25 or higher by Year 2 (GoSBA Loans SBA 7(a) Guide). The projections must be defensible with real assumptions — not hockey-stick guesses.
The Bottom Line
Cash flow is not a mystery. It is math you can do at your kitchen table.
Take the money the business produces in a year. Divide it by the money the loan will cost each year. If the answer is 1.25 or higher, you are ready. If it is not, work the four fixes — borrow less, stretch the term, document add-backs, or wait a quarter or two.
Do this math before you apply. Not after. Not during. Before.
The borrowers who get approved are not lucky. They are the ones who did the DSCR math themselves, saw a weak spot, fixed it, and only then walked into the bank.
The borrowers who get denied are almost always the ones who hoped the banker would somehow miss the problem. The banker never misses the problem. It is the first thing they check.
Sources: Federal Reserve Small Business Credit Survey — 2026 Report on Employer Firms; Federal Reserve Small Business Lending Survey Analysis (Crestmont Capital); Kansas City Fed Small Business Lending Survey Q3 2025; Required DSCR for SBA 7(a) Loans (SBA7a.loans); The Ultimate Guide to SBA 7(a) Loans in 2026 (GoSBA Loans).
The building lasts 50 years. Financing it over 25 years matches its life. Financing it over 7 years creates an artificial cash crunch that makes an otherwise good deal look terrible on paper.
Ask your lender to structure the loan the right way from the beginning. Do not accept a short term just because that's what the lender first offered.
Special Note: Startups
Startups face a unique problem — they don't have any history to show. There is no tax return to prove EBITDA.
If you are starting a brand-new business, lenders will look at:
1. Your projections — but they will discount them. Be conservative. Show monthly detail for Year
2. Comparable businesses — Vertical IQ, IBISWorld, RMA Annual Statement Studies. If similar coffee shops in similar towns typically do $400,000 in revenue, don't project $900,000.
3. Signed contracts or letters of intent — anything that proves revenue is real, not hoped for.
4. Your experience — a 15-year restaurant manager opening a restaurant is a very different risk than a first-time operator.
For a startup, most SBA lenders require projected DSCR of 1.15 or higher in Year 1 and 1.25 or higher by Year 2 (GoSBA Loans SBA 7(a) Guide). The projections must be defensible with real assumptions — not hockey-stick guesses.
The Bottom Line
Cash flow is not a mystery. It is math you can do at your kitchen table.
Take the money the business produces in a year. Divide it by the money the loan will cost each year. If the answer is 1.25 or higher, you are ready. If it is not, work the four fixes — borrow less, stretch the term, document add-backs, or wait a quarter or two.
Do this math before you apply. Not after. Not during. Before.
The borrowers who get approved are not lucky. They are the ones who did the DSCR math themselves, saw a weak spot, fixed it, and only then walked into the bank.
The borrowers who get denied are almost always the ones who hoped the banker would somehow miss the problem. The banker never misses the problem. It is the first thing they check.
Sources: Federal Reserve Small Business Credit Survey — 2026 Report on Employer Firms; Federal Reserve Small Business Lending Survey Analysis (Crestmont Capital); Kansas City Fed Small Business Lending Survey Q3 2025; Required DSCR for SBA 7(a) Loans (SBA7a.loans); The Ultimate Guide to SBA 7(a) Loans in 2026 (GoSBA Loans).
