Debt Service Coverage Analysis
DSCR calculations across scenarios, demonstrating SBA loan repayment capacity.
1. Loan Structure Assumptions
SBA 7(a) Small Loan Parameters
| Parameter | Value | Notes |
|---|---|---|
| Loan Type | SBA 7(a) Small Loan | Under $500K streamlined process |
| Term | 10 years | Standard for business acquisition/build-out |
| Rate | Prime + 2.75% | ~10.5% in current market (Prime ~7.75%) |
| Equity Injection | 10-20% | Varies by lender; 20% modeled for safety |
| Collateral | Personal guarantee + lease assignment | Standard SBA requirements |
| Prepayment | Allowed after 3 years | SBA standard terms |
Project Cost Components
| Component | Low | Mid | High | Notes |
|---|---|---|---|---|
| Build-out ($100-150/SF x 3,000 SF) | $300,000 | $375,000 | $450,000 | Per Phase 6 estimates |
| Landlord TI Allowance (~$30/SF) | ($90,000) | ($90,000) | ($90,000) | Negotiated concession |
| Net Build-Out Cost | $210,000 | $285,000 | $360,000 | Amount to finance |
| Owner Equity (20%) | $42,000 | $57,000 | $72,000 | Cash contribution |
| SBA Loan Amount | $168,000 | $228,000 | $288,000 | 80% financing |
Available Owner Resources
| Source | Amount | Notes |
|---|---|---|
| Owner Cash Available | $150,000 | Per PROJECT.md |
| Remaining after Equity Injection | $78,000-$108,000 | For working capital |
| Working Capital Required | $35,000-$50,000 | Per occupancy-scenarios.md |
| Cash Buffer | $28,000-$73,000 | Contingency reserve |
2. Loan Payment Calculations
Amortization Formula
Monthly Payment = P * [r(1+r)^n] / [(1+r)^n - 1]
Where:
- P = Principal loan amount
- r = Monthly interest rate (annual rate / 12)
- n = Number of payments (120 for 10-year term)
Scenario 1: Low-End Build-Out ($300K Total)
| Parameter | Value |
|---|---|
| Total Project Cost | $300,000 |
| Landlord TI | ($90,000) |
| Net Cost | $210,000 |
| Owner Equity (20%) | $42,000 |
| Loan Amount | $168,000 |
| Interest Rate | 10.5% (0.875%/month) |
| Term | 120 months |
| Monthly P&I | $2,271 |
| Annual Debt Service | $27,252 |
Amortization Summary (Year 1):
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $2,271 | $801 | $1,470 | $167,199 |
| 6 | $2,271 | $837 | $1,434 | $163,104 |
| 12 | $2,271 | $875 | $1,396 | $158,780 |
| Year 1 Total | $27,252 | $10,220 | $17,032 |
Scenario 2: Mid-Range Build-Out ($375K Total)
| Parameter | Value |
|---|---|
| Total Project Cost | $375,000 |
| Landlord TI | ($90,000) |
| Net Cost | $285,000 |
| Owner Equity (20%) | $57,000 |
| Loan Amount | $228,000 |
| Interest Rate | 10.5% (0.875%/month) |
| Term | 120 months |
| Monthly P&I | $3,082 |
| Annual Debt Service | $36,984 |
Amortization Summary (Year 1):
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $3,082 | $1,087 | $1,995 | $226,913 |
| 6 | $3,082 | $1,136 | $1,946 | $221,355 |
| 12 | $3,082 | $1,187 | $1,895 | $215,488 |
| Year 1 Total | $36,984 | $12,512 | $24,472 |
Scenario 3: High-End Build-Out ($450K Total)
| Parameter | Value |
|---|---|
| Total Project Cost | $450,000 |
| Landlord TI | ($90,000) |
| Net Cost | $360,000 |
| Owner Equity (20%) | $72,000 |
| Loan Amount | $288,000 |
| Interest Rate | 10.5% (0.875%/month) |
| Term | 120 months |
| Monthly P&I | $3,893 |
| Annual Debt Service | $46,716 |
Amortization Summary (Year 1):
| Month | Payment | Principal | Interest | Balance |
|---|---|---|---|---|
| 1 | $3,893 | $1,373 | $2,520 | $286,627 |
| 6 | $3,893 | $1,434 | $2,459 | $279,614 |
| 12 | $3,893 | $1,500 | $2,393 | $272,332 |
| Year 1 Total | $46,716 | $15,668 | $31,048 |
3. Debt Service Coverage Ratio Analysis
DSCR Formula
DSCR = Net Operating Income / Total Debt Service
SBA Requirement: DSCR >= 1.15-1.25x (varies by lender)
DSCR by Occupancy Level - Scenario 1 ($168K Loan)
| Occupancy | Annual NOI* | Debt Service | DSCR | SBA Pass? |
|---|---|---|---|---|
| 62% (break-even) | $0 | $27,252 | 0.00x | NO |
| 70% | $11,340 | $27,252 | 0.42x | NO |
| 75% | $24,420 | $27,252 | 0.90x | NO |
| 80% | $37,392 | $27,252 | 1.37x | YES |
| 85% | $56,812 | $27,252 | 2.08x | YES |
| 90% | $63,372 | $27,252 | 2.32x | YES |
| 95% | $77,988 | $27,252 | 2.86x | YES |
*NOI = Gross Profit from facility-pl.md (Year 2+ at stabilized occupancy)
DSCR by Occupancy Level - Scenario 2 ($228K Loan)
| Occupancy | Annual NOI* | Debt Service | DSCR | SBA Pass? |
|---|---|---|---|---|
| 62% (break-even) | $0 | $36,984 | 0.00x | NO |
| 70% | $11,340 | $36,984 | 0.31x | NO |
| 75% | $24,420 | $36,984 | 0.66x | NO |
| 80% | $37,392 | $36,984 | 1.01x | NO |
| 85% | $56,812 | $36,984 | 1.54x | YES |
| 90% | $63,372 | $36,984 | 1.71x | YES |
| 95% | $77,988 | $36,984 | 2.11x | YES |
DSCR by Occupancy Level - Scenario 3 ($288K Loan)
| Occupancy | Annual NOI* | Debt Service | DSCR | SBA Pass? |
|---|---|---|---|---|
| 62% (break-even) | $0 | $46,716 | 0.00x | NO |
| 70% | $11,340 | $46,716 | 0.24x | NO |
| 75% | $24,420 | $46,716 | 0.52x | NO |
| 80% | $37,392 | $46,716 | 0.80x | NO |
| 85% | $56,812 | $46,716 | 1.22x | MARGINAL |
| 90% | $63,372 | $46,716 | 1.36x | YES |
| 95% | $77,988 | $46,716 | 1.67x | YES |
Warning: Scenario 3 ($288K loan) achieves only 1.22x DSCR at 85% occupancy, which may not meet conservative SBA lender requirements (1.25x).
Minimum Occupancy for 1.25x DSCR
| Loan Scenario | Debt Service | Min Occupancy for 1.25x DSCR |
|---|---|---|
| $168,000 | $27,252 | 73% |
| $228,000 | $36,984 | 79% |
| $288,000 | $46,716 | 87% |
4. Rate Sensitivity Analysis
Impact of Interest Rate Variation
Scenario 2 ($228K Loan) at Different Rates:
| Rate | Monthly Payment | Annual DS | DSCR @ 85% Occ | Change from Base |
|---|---|---|---|---|
| 9.0% | $2,888 | $34,656 | 1.64x | +0.10x |
| 9.5% | $2,952 | $35,424 | 1.60x | +0.06x |
| 10.0% | $3,017 | $36,204 | 1.57x | +0.03x |
| 10.5% (Base) | $3,082 | $36,984 | 1.54x | - |
| 11.0% | $3,148 | $37,776 | 1.50x | -0.04x |
| 11.5% | $3,214 | $38,568 | 1.47x | -0.07x |
| 12.0% | $3,281 | $39,372 | 1.44x | -0.10x |
Rate Sensitivity - All Scenarios at 85% Occupancy
| Rate | $168K DSCR | $228K DSCR | $288K DSCR |
|---|---|---|---|
| 9.0% | 2.22x | 1.64x | 1.30x |
| 10.5% (Base) | 2.08x | 1.54x | 1.22x |
| 12.0% | 1.95x | 1.44x | 1.14x |
Key Finding: At 12% rate, the $288K loan scenario drops below 1.15x DSCR minimum, making SBA approval unlikely.
5. Cash Flow After Debt Service
Year 2+ (Stabilized at 85% Occupancy)
| Line Item | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| Gross Profit | $56,812 | $56,812 | $56,812 |
| Debt Service | ($27,252) | ($36,984) | ($46,716) |
| Cash Before Owner Draw | $29,560 | $19,828 | $10,096 |
| Owner Draw (annual) | |||
| - Conservative ($3K/mo) | ($36,000) | ($36,000) | ($36,000) |
| - Moderate ($4K/mo) | ($48,000) | ($48,000) | ($48,000) |
| Net Cash - Conservative | ($6,440) | ($16,172) | ($25,904) |
| Net Cash - Moderate | ($18,440) | ($28,172) | ($37,904) |
Finding: Only Scenario 1 ($168K loan) can support meaningful owner compensation. Larger loans require either:
- Higher occupancy (90%+)
- Minimal owner draw in early years
- Additional revenue streams
Year 1 (Ramp-Up Phase)
| Line Item | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| Year 1 Gross Profit | $8,105 | $8,105 | $8,105 |
| Debt Service | ($27,252) | ($36,984) | ($46,716) |
| Year 1 Cash Deficit | ($19,147) | ($28,879) | ($38,611) |
Working Capital Bridge Required:
| Scenario | Y1 Cash Deficit | + Buffer (20%) | Total Working Capital |
|---|---|---|---|
| $168K Loan | $19,147 | $3,829 | $23,000 |
| $228K Loan | $28,879 | $5,776 | $35,000 |
| $288K Loan | $38,611 | $7,722 | $47,000 |
6. SBA Loan Comparison Matrix
Side-by-Side Summary
| Metric | Scenario 1 | Scenario 2 | Scenario 3 |
|---|---|---|---|
| Project Cost | $300,000 | $375,000 | $450,000 |
| Loan Amount | $168,000 | $228,000 | $288,000 |
| Owner Equity | $42,000 | $57,000 | $72,000 |
| Monthly Payment | $2,271 | $3,082 | $3,893 |
| Annual Debt Service | $27,252 | $36,984 | $46,716 |
| DSCR @ 85% Occ | 2.08x | 1.54x | 1.22x |
| Min Occ for 1.25x | 73% | 79% | 87% |
| Cash After DS (Y2) | $29,560 | $19,828 | $10,096 |
| Y1 Working Capital | $23,000 | $35,000 | $47,000 |
| SBA Approval Risk | Low | Low | Moderate |
Recommendation Matrix
| If Build-Out Cost Is... | Recommendation | Rationale |
|---|---|---|
| $300K (Low) | Proceed | Strong DSCR, sustainable owner compensation |
| $375K (Mid) | Proceed with caution | Viable but limited owner draw in early years |
| $450K (High) | Reduce scope or increase equity | Marginal DSCR, may not meet SBA threshold |
7. Loan Structure Optimization
Option A: Increase Owner Equity (Scenario 3)
| Parameter | Base | 25% Equity | 30% Equity |
|---|---|---|---|
| Owner Equity | $72,000 | $90,000 | $108,000 |
| Loan Amount | $288,000 | $270,000 | $252,000 |
| Monthly Payment | $3,893 | $3,649 | $3,406 |
| DSCR @ 85% | 1.22x | 1.30x | 1.39x |
Finding: 30% equity ($108K) brings DSCR to acceptable 1.39x but uses 72% of available cash.
Option B: Extend Term (SBA 7(a) allows up to 25 years for RE)
Note: Standard 7(a) for non-real estate is 10 years max. If lease is long enough, some lenders allow 15-year.
| Parameter | 10-Year | 15-Year (if available) |
|---|---|---|
| Loan Amount | $228,000 | $228,000 |
| Monthly Payment | $3,082 | $2,498 |
| Annual DS | $36,984 | $29,976 |
| DSCR @ 85% | 1.54x | 1.90x |
Finding: Extended term significantly improves cash flow but may not be available for build-out loans.
Option C: Negotiate Better TI Allowance
| TI Allowance | Net Build-Out | Loan Needed | DSCR @ 85% |
|---|---|---|---|
| $30/SF ($90K) | $285,000 | $228,000 | 1.54x |
| $40/SF ($120K) | $255,000 | $204,000 | 1.72x |
| $50/SF ($150K) | $225,000 | $180,000 | 1.95x |
Finding: Every additional $10/SF in TI allowance reduces loan by ~$24K and improves DSCR by ~0.2x.
8. SBA Presentation Summary
Recommended Loan Request: Scenario 2 ($228,000)
Loan Terms:
- Amount: $228,000
- Term: 10 years
- Estimated Rate: Prime + 2.75% (~10.5%)
- Monthly Payment: $3,082
- Annual Debt Service: $36,984
Use of Funds:
| Category | Amount | % of Total |
|---|---|---|
| Build-Out Construction | $285,000 | 100% |
| Less: Landlord TI | ($90,000) | |
| Less: Owner Equity | ($57,000) | |
| SBA Loan Proceeds | $228,000 |
Collateral:
- Personal guarantee (owner)
- Assignment of lease
- Business assets (FF&E)
Debt Service Coverage:
| Year | Gross Profit | Debt Service | DSCR |
|---|---|---|---|
| Year 1 | $8,105 | $36,984 | 0.22x* |
| Year 2 | $56,812 | $36,984 | 1.54x |
| Year 3 | $58,476 | $36,984 | 1.58x |
*Year 1 shortfall covered by working capital reserve
Risk Mitigants:
- Working capital reserve of $35,000+ bridges Year 1 deficit
- Break-even at 62% occupancy well below target 85%
- Market validation: competitor waitlists indicate unmet demand
- Owner-operated model reduces fixed costs vs. managed facilities
- Conservative build-out scope maintains DSCR cushion
9. Key Findings & Recommendations
Critical Findings
-
Loan Size Threshold: Maximum supportable loan at 85% occupancy with 1.25x DSCR is approximately $260,000.
-
Year 1 Challenge: All scenarios require working capital bridge due to ramp-up period. Budget $35,000-$50,000 depending on scenario.
-
Owner Compensation: At 85% occupancy with $228K loan, cash available for owner draw is ~$20,000/year after debt service. Meaningful owner income requires 90%+ occupancy or smaller loan.
-
Rate Risk: A 1.5% rate increase (to 12%) reduces DSCR by ~0.1x. Scenario 3 becomes unviable at higher rates.
-
TI Leverage: Every $10/SF increase in landlord TI allowance reduces loan needs by $30,000 and improves DSCR by 0.2x.
Recommendations
| Priority | Recommendation |
|---|---|
| 1 | Target mid-range build-out ($375K) with $228K loan - provides good facility quality with acceptable DSCR |
| 2 | Negotiate TI allowance aggressively - target $40-50/SF vs. baseline $30/SF |
| 3 | Maintain $35,000+ working capital reserve - non-negotiable for Year 1 bridge |
| 4 | Plan for minimal owner draw in Year 1 - debt service takes priority |
| 5 | Lock in rate if possible - variable rates add cash flow uncertainty |
| 6 | If build-out exceeds $400K, increase equity injection to 25%+ |
Appendix: Amortization Schedules
A.1 Scenario 2 ($228K) - Full Year 1-3 Summary
| Year | Beginning Balance | Principal Paid | Interest Paid | Ending Balance |
|---|---|---|---|---|
| 1 | $228,000 | $12,512 | $24,472 | $215,488 |
| 2 | $215,488 | $13,896 | $23,088 | $201,592 |
| 3 | $201,592 | $15,434 | $21,550 | $186,158 |
A.2 Total Interest Cost Comparison
| Scenario | Loan Amount | Total Interest (10 yr) | Total Payments |
|---|---|---|---|
| $168,000 | $168,000 | $104,520 | $272,520 |
| $228,000 | $228,000 | $141,840 | $369,840 |
| $288,000 | $288,000 | $179,160 | $467,160 |
Debt Service Model Complete Phase 8: Facility Financial Model - Plan 02 Task 1 Complete
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