Debt service coverage

by a searcher

1 month ago

I'm interested to learn what DSCR Bank and Non Bank lenders think is healthy when make lending decisions. It's my understanding that for SBA deals Banks will loan at around 1.25x which I think is cutting it a bit thin. 

What about for non SBA and non guaranteed deals (if non guaranteed is possible)?

I've read that anywhere north of 1.75x is very healthy.

Thank you.

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2 comments

intermediary from San Diego State University

Usually is between 1.25X to 1.35x debt coverage for banks. 1.0x for fincos

2 weeks ago | like reply | 0 likes

lender from Eastern Illinois University

The answer here I am using for this question is based on adjusted EBITDA just so everyone is aware. Under the SBA rules you can go down to a 1.15x DSCR. However, most lenders want a minimum of 1.25x DSCR in the last two fiscal periods. There are some that require even higher DSCR if it is a change in ownership transaction, but that can vary depending on the lender. Please keep in mind lenders will not always use all of the add-backs provided by a seller. Although I always recommend trying to get a higher DSCR when possible, sometimes where the lender calculates it at versus what you really believe it to be will be different. In those cases you might feel comfortable because you believe it is higher but the Bank might only need to hit the 1.25x without including all of the add-backs.

Under conventional bank lending most lenders want to be between 1.35x DSCR to 1.50x DSCR (with most closer to the 1.50x minimum) for leveraged business acquisitions. But this can vary by lender. The bigger issue with conventional bank lending is most want to be at a much lower leverage ratio.

For the non-bank lenders we typically see them wanting to be close to 1.50x or higher, but again this can vary from transaction to transaction.

A lot of the decision for all three options has to do with how consistent the cash flow is. The more consistent the cash flow the more I typically find lenders willing to be flexible on the minimum they will require. In those cases lenders are less worried about future fluctuations. When you have quickly growing businesses, sometimes it can be hard to hit the minimum DSCR two periods in a row. This can make it challenging to get some deals done unless the lender accepts a slightly lower DSCR for past years. In those cases they will rely on how consistently the business has been growing and their confidence in your ability to maintain at least current revenues or that growth post acquisition.

I hope this helps. If you would like to discuss in more detail you can reach me here or directly at --@----.com

1 month ago | like reply | 1 like

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