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Debt-service coverage for an SBA loan review
Debt-service coverage compares operating cash flow with required debt payments. Start with a complete borrowing schedule and the lender’s applicable SBA program, then document every adjustment to the calculation.
This guide describes common bookkeeping practice, not a legal or regulatory requirement.
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General information, not legal or tax advice.
Identify which SBA standard applies
SBA SOP 50 10 8.1, effective October 1, 2026, sets Standard 7(a) coverage at at least 1.15 on a historical or projected basis and 1:1 globally. Its non-change-of-ownership 7(a) Small rule uses at least 1.10:1. These are program-specific requirements, not a universal bank lending target.
Build the cash-flow numerator
The SOP defines coverage as operating cash flow divided by debt service, with operating cash flow defined as EBITDA. Start with the financial statements and identify interest, taxes, depreciation and amortization consistently. Retain the reconciliation so the lender can trace the proposed cash-flow figure to the books.
Include the new loan in required payments
SBA defines debt service as future required principal and interest on all business debt, including the new SBA borrowing. Its guidance also calls for a current debt schedule that includes shareholder debt. Reconcile lender statements and payment terms rather than using only the expense accounts in the ledger.
Explain adjustments and projected improvements
Lenders must justify cash-flow adjustments, including nonrecurring items, capital spending and certain distributions. For Standard 7(a) projections, the SOP calls for coverage of at least 1.15 within 2 years of funding. Support a projected improvement with operating assumptions instead of adding back costs without an explanation.
Update payroll assumptions in projected cash flow
DIR confirms California’s statewide minimum wage increases to $17.40 per hour on January 1, 2027. If a loan projection spans that change, review affected payroll assumptions before calculating projected coverage. An expected improvement in operating cash flow should be assessed alongside known cost changes, with higher applicable rates reviewed separately.
Sources: DIR: confirmed 2027 minimum wage and exempt salary announcement
Sources: identify which SBA standard applies
Related records and decisions
Prepare the records for a coverage review
Tidwell helps reconcile the books and organize supporting schedules for your business decisions. We work with your CPA on tax questions and the financial records they need.