DSCR Loan for SBA 504 loans in 2024 Easy Guide

DSCR Loan eligibility for an SBA 504 loan is imperative to demonstrate your firm’s capacity to repay the loan. A comprehensive financial plan, along with the requisite financial statements, are crucial components in this regard. Nevertheless, the majority of underwriters will incorporate the debt service coverage ratio (DSCR) as a significant factor in their decision-making procedure.

The Debt Service Coverage Ratio (DSCR Loan) is an important factor  when applying for SBA 504 loans

To be eligible for an SBA 504 loan, it is imperative that your company demonstrates its capacity to repay the loan. A comprehensive business plan and the requisite financial documents are crucial factors in this regard. Nevertheless, the majority of underwriters will incorporate the debt service coverage ratio (DSCR) as a significant factor in their decision-making procedure.

The debt service coverage ratio is the cash flow available to meet annual interest and principal payments on any new or existing debt is the primary consideration. The lender will use a precise calculation to determine a ratio that indicates your capacity to repay your debts. The equation appears as follows:

1. EBIT (Earnings Before Interest and Taxes)
2. Taxes
3. Depreciation and amortization
4. Rental expenses
5. Rental income, if applicable

The sum of these figures represents your enterprise’s “available cash” balance. On the contrary, you have:

1. First mortgage 
2. secondary mortgage
3. Existing debt

All of these numbers are summed up to provide you with your overall debt service.

The final equation appears as follows:

Cash Available / Total Debt Service = DSCR

Typically, financial institutions prefer a Debt Service Coverage Ratio (DSCR) of at least 1.2:1 or higher. Based on the calculations, your debt service coverage ratio is 1.2, indicating a favorable cash flow situation and a high likelihood of loan repayment.

Debt Service Coverage Ratio (DSCR) Varies Among Lenders

Remember that the Debt Service Coverage Ratio (DSCR) requirement may vary among different lenders. Every lender has distinct requirements that you need to fulfill. One financial institution may permit a debt service coverage ratio (DSCR) from the previous year, while requiring a DSCR of 1.2 or greater for the present year.

During the pre-approval process, your DSCR will be calculated by your lender. However, you may proactively assess your standing by computing it on your own. The formula mentioned above will help you in achieving your objective, however, it is imperative to refrain from committing certain common errors during the process.

What is the maximum loan amount for an SBA 504 loan?

The maximum loan amount for SBA 504 is presently established at $5 million in lifetime dollars. For small manufacturing businesses, the maximum borrowing limit is $5.5 million over the course of their lifetime. Please be advised that opting for energy-related initiatives categorized under the “go green” label may result in a significantly higher borrowing capacity. The maximum borrowing limit for any project is $5 million. However, the total amount that can be borrowed over the course of a lifetime is $16.5 million.

The eligibility requirements for an SBA 504 loan

To qualify for an SBA 504 loan, your business must satisfy the requirements for eligibility as follows:

• Your enterprise must be a profit-making entity.
• Your enterprise must comply with the prevailing SBA size criteria.
• The maximum allowable net worth for your business is $15 million.

It is not permissible for your enterprise to generate 33% or more of its revenue from packaging SBA loans.

Your business’s annual revenue should not exceed $5 million (post-tax) for the past two years. We cannot authorize any passive or speculative activities for your business. Please be advised that CDCs or conventional lenders may impose additional requirements.

The interest rate for an SBA 504 loan

The interest rate for an SBA 504 loan comprises the relevant Treasury bond rate, a guarantee fee remitted by the lender to the SBA, a servicing fee payable by the lender to the CDC, and a fee to the central servicing agent. A loan with a term of 10 years will be determined by the 10-year treasury bond rate plus fee ranging from 1.5% to 3.5%, in addition to a fixed fee of 0.38%. Similarly, a loan with a term of 20 years will be determined by the 20-year treasury bond rate plus fees ranging from 1.5% to 3.5%, in addition to a fixed fee of 0.48%. Furthermore, there exists a one-time fee of 2.15% that is payable to the SBA, in addition to other fees that have to be paid at the time of closing.