Hitting a major revenue milestone feels like proof that your business is succeeding. Whether you’re bringing in $100,000 in annual sales or finally reached the $1 million mark, it’s natural to assume those numbers will make qualifying for financing easier. But the reality looks a little different, and when it comes to an SBA loan, revenue is just one piece of a larger picture.
When you apply for financing, lenders look at more than just the money your business brings in. They also look at how much is left over after your bills are paid—your profit—as an indicator of whether or not you’re able to take on the payments that come with a new loan. When you, as a business owner, only look at revenue, this conversation can take you by surprise.
In this article, we’ll explain how lenders evaluate your financials, why profit matters more than revenue during the lending process, and what you can do to strengthen your profit before you apply for financing.
What lenders are really measuring and why thin margins worry them
When you apply for an SBA loan, lenders review where your business stands financially. Revenue is certainly part of the conversation, but it isn’t the number that carries the most weight.
Lenders use your profit to calculate a specific metric called the Debt Service Coverage Ratio (DSCR), which measures whether your business generates enough profit to comfortably cover its loan payments. To calculate it, lenders start with your EBITDA (earnings before interest, taxes, depreciation, and amortization), a common way of measuring a business’s underlying profit, and divide it by your total debt payments, including principal and interest.
The SBA’s benchmark DSCR is 1.15. A ratio above that tells a lender your business is generating enough profit to cover day-to-day operations, existing debt, and new debt on top of that. A ratio below it signals the new payments could stretch the business too thin. Because DSCR is built on profit rather than revenue, a business with higher sales can actually look weaker to a lender than a business with tighter expenses and a healthier margin.
Two businesses, two very different lending stories
Let’s look at two business scenarios to see how revenue, expenses, profit, and debt service affect DSCR and a business’s ability to qualify for a loan.
| Business A | Business B | |
| Annual revenue | $1,000,000 | $400,000 |
| Operating expenses | $550,000 | $150,000 |
| EBITDA | $450,000 | $250,000 |
| Loan principal payments | $300,000 | $100,000 |
| Loan interest payments | $100,000 | $50,000 |
| Total debt service | $400,000 | $150,000 |
| DSCR | 1.13 | 1.67 |
At first glance, Business A looks like the stronger business, with $1 million in annual revenue and more than double the EBITDA of Business B. But its DSCR of 1.13 falls just short of the SBA’s 1.15 minimum, meaning that under this scenario, it wouldn’t qualify. Business B, despite generating less than half the revenue and profit, comfortably clears the threshold with a DSCR of 1.67.
This is why lenders don’t evaluate businesses based on size alone. Revenue shows how big a business is, but profit and DSCR show how well-positioned it is to take on debt. If your DSCR falls below the SBA’s threshold, boosting your profit can go a long way toward raising that number and qualifying for financing.
4 ways to boost your profit before you apply for SBA financing
If your business’s DSCR doesn’t meet SBA’s 1.15 threshold yet, you can use the following strategies to boost profit before applying for SBA financing:
- Review your pricing: Many small businesses underprice their work. If you’re in this category, even a 3% to 5% increase can add thousands to your bottom line without losing customers.
- Take a fresh look at recurring expenses: Look at your active expenses, including subscriptions, supplier contracts, leases, and insurance. If something isn’t delivering the value that it once did, you can renegotiate the contract or cancel the service.
- Review business operations to spot and improve inefficiencies: Reviewing your processes to see where you can cut back on labor or materials cost while maintaining quality can boost profits.
- Monitor your profit throughout the year: Each month, review the profit your business generated. A simple monthly look at income versus expenses catches problems early and gives you time to adjust before you apply for a loan.
How Grow America can help you get loan-ready
Preparing for financing isn’t just about gathering tax returns and financial statements. It’s about showing the lender the full financial picture. Grow America looks beyond your top-line number to truly understand your business. When you come to us early, we’ll flag exactly where the profit picture needs strengthening before you apply and identify opportunities to boost profitability and improve your loan readiness.
If you’re considering SBA financing, schedule a free financial review with Grow America. Our loan specialists will look at your business finances, discuss your goals, and help you prepare for a successful loan application. Give us a call, so we can get started today.
