Financing & Leverage

SBA 7(a) Bank Debt Service Coverage Ratio (DSCR) Stress Test

SBA lenders require a minimum 1.25x Debt Service Coverage Ratio (DSCR) based on historical tax returns, NOT broker pro-forma earnings. If tax returns show heavy write-offs, the loan will be denied.

🚩 Common Seller Red Flags & Tricks

Large discrepancy between seller tax returns (Form 1120-S) and broker marketing P&Ls.
Cash transactions or undeclared income that cannot be documented on official IRS tax transcripts.
DSCR below 1.25x when calculated against 10-year SBA loan amortization at current Prime + 2.75% rates.
Lack of clean 3-year historical financial records required by SBA SOP guidelines.

🛡️ Buyer Forensic Audit Steps

Order official IRS Form 4506-C tax return transcripts for the prior 3 fiscal years.
Calculate normalized debt service at prevailing SBA interest rates with 10% equity injection.
Stress-test cash flow assuming a 20% post-acquisition revenue contraction.
Obtain lender pre-qualification letter before submitting a binding Letter of Intent (LOI).

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