Cash flow, first and last
Debt service coverage ratio - adjusted cash flow divided by total debt service - is the first calculation an underwriter performs and the one that kills most applications. Most SBA and bank lenders want at least 1.25×, meaning the business generates 25% more cash than it needs to service all its debt.
The adjustments matter. Depreciation and amortisation are added back as non-cash. Existing interest is added back and counted separately. Owner compensation and documented personal expenses run through the business are added back as discretionary - and then a market salary for whoever will operate the business is subtracted. You cannot make a marginal deal work by promising to pay yourself nothing.
Credit, personal before business
For nearly every loan under a few million dollars, the owner's personal credit is checked and matters. The SBA sets no minimum score; individual lenders do, and published thresholds commonly sit in the high 600s. A recent bankruptcy, tax lien, or default on prior federal debt is a harder obstacle than a mediocre score.
Business credit files - Dun & Bradstreet, Experian Business, Equifax Business - matter more as the loan grows and for trade credit, and less than owners generally expect on a first bank loan.
Collateral, and what it is really for
Collateral does not cause a loan to be approved. Cash flow does that. Collateral determines the loss given default, which affects pricing and how comfortable the credit committee is with an otherwise marginal file.
SBA rules do not require a loan to be fully collateralised, which is one of the programme's genuine advantages - but the SBA does require the lender to take available collateral, which routinely includes a lien on the owner's home if there is meaningful equity in it. This surprises people and it should be understood before the application, not at closing.
Capacity of the operator
Relevant industry experience carries real weight, especially on an acquisition. An underwriter reading a file for a first-time buyer entering an unfamiliar trade is looking at a materially different risk from the same numbers under an operator who has run a similar business for a decade.
This is also the most improvable factor in the short term: a management team member with the missing experience, or a documented transition period with the seller, changes the read.
The story the documents tell
Three years of business and personal tax returns, interim financials, a debt schedule, and - for an acquisition - the target's books. Underwriters are reading for consistency. Revenue on the tax return that does not match the P&L, deposits that do not match reported sales, or a debt schedule missing a facility that appears on the credit report will stall a file faster than a weak ratio.
The most common cause of a slow SBA closing is not the SBA. It is documents arriving late, in the wrong format, or contradicting each other.
What you can change before applying
Clean up the books so the tax return and the P&L reconcile. Pay down or consolidate revolving balances that inflate debt service. Document discretionary add-backs so they survive scrutiny. Assemble the document package before you apply rather than after.
What you cannot change quickly: your industry's loss history, your time in business, and a recent default. Those are worth knowing about early, because they determine which lenders are realistic.
Questions
- What credit score do I need for a business loan?
- There is no universal minimum. Bank and SBA lenders commonly look for scores in the high 600s or above; alternative lenders go considerably lower at considerably higher cost. Score is a filter, not the decision - cash flow is the decision.
- Will a lender take a lien on my house?
- For SBA loans, if you have substantial equity in personal real estate the lender is generally required to take a lien on it when business collateral is insufficient. Whether that happens depends on the loan size and the collateral shortfall, and it is a fair question to ask before you apply.