My deal cleared 1.15x DSCR. What happens now that the SBA requires 1.25x?

Which rule applies to my deal?

The date that matters is the date your lender obtains the SBA loan number, not the date you signed a letter of intent. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026, per SBA Information Notice 5000-880695. FunderIntel reports that applications numbered through September 30 stay under the earlier SOP 50 10 8.

Ask your lender in writing which SOP your file is under and when it expects the loan number. If the answer is on or after October 1, plan for 1.25x.

What changed in the coverage test?

• An Initial Acquisition or Owner Buyout must reach 1.25x. The previous floor was 1.15x.
• A Business Expansion stays at 1.15x.
• The test uses historical or adjusted historical cash flow: the last fiscal year or the average of the last two.
• Post-closing projections can be reviewed but cannot be used to meet the ratio.
• Where a quality of earnings report is required (purchase price of $3 million or more), the lender uses its earnings figure in the test.

Lenders can also set their own, higher standards. A Searchfunder post by the founder of a deal-screening tool says lender overlays are usually above the 1.25x SBA minimum.

How much does 1.25x change the math? A worked example

These inputs are assumptions. Price $1,500,000. Working capital, fees and closing costs $100,000. Rate 10%, 10-year amortization, which is the business-portion maximum. The business shows $270,000 of supportable annual cash flow after a replacement salary.

1. Total project costs: $1,500,000 + $100,000 = $1,600,000.
2. Injection at 10%: $160,000. SBA loan: $1,440,000.
3. Annual debt service: $1,440,000 x 0.15858 = about $228,356.
4. Coverage: $270,000 / $228,356 = 1.18x. That clears 1.15x and fails 1.25x.
5. Cash flow needed at 1.15x: about $262,610. At 1.25x: about $285,446. The gap is about $22,836 a year.

What are my options if the deal now falls short?

Start with the largest loan the cash flow supports: $270,000 / 1.25 / 0.15858 = about $1,362,081. The loan has to fall by about $77,919. There are four ways to get there.

• Lower the price. Maximum project costs are $1,362,081 / 0.9 = about $1,513,423, so the price falls to about $1,413,423. That is a cut of about $86,577, or 5.8%.
• Add cash. Keep the price and put in about $77,919 more equity, for about $237,919 in total.
• Use a full-standby seller note for the gap. A note with no payments for the life of the SBA loan counts toward the injection, up to half of it. Half of $160,000 is $80,000, so a $77,919 note fits, and your own cash stays at $160,000. It is not counted in debt service. Lenders differ on how they count a standby note above the minimum injection, so confirm the structure first. See Can a seller note count toward the SBA 10% down payment?.
• Test a two-year average. If the last year was weak, the average of two years may clear. Bankwell gives an illustration where one year fails at 1.18x and the two-year average passes at 1.26x.

A regular seller note does not solve this. Payments on a note that is not on full standby are included in debt service, at a maximum 10-year amortization.

Does the price still hold if the loan shrinks?

Not unless you cover the difference. Total debt is capped at the independent valuation, and the lender will not finance any gap between price and value. Cantrell Law adds that lender valuations tend to be conservative on owner dependence and customer concentration. Read The asking price was set under the old SBA rules. How do I use the 1.25x rule to negotiate price? before you go back to the seller.

If you already own a business

A Business Expansion is tested at 1.15x and the lender may reduce or waive the injection. It requires an existing business with at least two full fiscal years under your ownership that buys 100% of another business in the same four-digit NAICS industry group. If your deal fits, the old math still applies.

Where these numbers come from: Effective date from SBA Information Notice 5000-880695. Coverage ratios, historical-only testing, injection and standby limits from Starfield & Smith, Beancount, Cantrell Law and FunderIntel. The payment factor of 0.15858 is the annual total of monthly payments per dollar borrowed at 10% over 10 years. I could not open the SOP text itself, so confirm current terms with an SBA lender.

Related questions

Can I still close under the old 1.15x rule?

Only if your lender received the SBA loan number before October 1, 2026, per SBA Information Notice 5000-880695. As of October 2026, new files are numbered under SOP 50 10 8.1.

Can I count my own plans to grow the business?

No. Coverage is tested on historical or adjusted historical cash flow. Projections can be reviewed but cannot be used to reach the ratio.

Is a 1.25x result enough to be approved?

It is the SBA minimum, not a guarantee. The lender still needs a valuation that supports the price and, at $3 million or more, a quality of earnings report.

What comes next

Once you know whether the deal clears, rebuild the number from the seller's tax returns, not the listing: How do I calculate DSCR on a business I want to buy (using tax returns, not the broker's SDE)? The buyers who end up with the most valuable companies think about what the business goes into before they buy it, because a coverage test is easier to meet when the parent can pay in something other than debt.

Related articles

• What are the SBA 7(a) rules for buying a business in 2026 (SOP 50 10 8.1)?
• How much will a bank lend to buy a business?
• How do I calculate DSCR on a business I want to buy (using tax returns, not the broker's SDE)?
• The asking price was set under the old SBA rules. How do I use the 1.25x rule to negotiate price?
• Can a seller note count toward the SBA 10% down payment?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.