Every week I talk to small business owners who got denied a loan they were sure they'd get approved for. The story is almost always the same. Revenue was up. Sales were strong. They felt good walking in.
Then they got a no.
And they have no idea why.
I spent 11 years on the other side of that desk — reading credit files, running numbers, and making the call on whether a business gets funded or not. So let me tell you exactly what happened.
The banker wasn't looking at your revenue the way you think they were.
Revenue is just the starting point
When a commercial loan file lands on an underwriter's desk, revenue is the first number we see — and almost immediately we move past it. Revenue tells us the size of the business. It does not tell us whether you can repay a loan.
What we actually care about is what's left after you pay your bills.
That number has a name: cash flow. Specifically, we're looking at something called the Debt Service Coverage Ratio — DSCR for short. It's the single most important number in your entire loan file. And most business owners have never heard of it.
DSCR in plain English: Take what your business earns before paying debt. Divide it by what you'd owe on the new loan plus any existing debt payments. If that number is 1.25 or higher, you're in the conversation. Below 1.0 and you're done — regardless of what your revenue looks like.
1.25x
Minimum DSCR most banks want
#1
Factor underwriters look at first
80%
Of denials trace back to cash flow
Here's what that looks like in real life
Say your business does $500,000 in annual revenue. Sounds solid. But after payroll, rent, inventory, and operating expenses, your net operating income is $60,000. You're asking for a loan that requires $70,000 in annual debt payments.
Your DSCR is 0.86.
Denied. Every time. Doesn't matter that you did half a million in sales.
Now flip it. Same business, same revenue — but you've been managing expenses tightly. Net operating income is $95,000. Same loan. DSCR is 1.36.
Now we're talking.
What most business owners get wrong
The mistake isn't walking in with strong revenue. The mistake is not knowing your own DSCR before you apply.
When you don't know that number, you can't fix it. And when you can't fix it, you walk into a bank, hand over your financials, and wait for a decision that was essentially made the moment the underwriter ran your cash flow calculation — usually within the first ten minutes of reviewing your file.
The business owners who get approved consistently are the ones who do the math before they apply. They know their DSCR. They know whether they need to pay down existing debt first, reduce expenses, or wait another quarter before applying. They show up prepared.
That's what this newsletter is about. Every issue I'm going to give you one thing — something real, from inside the credit process — that puts you on the right side of that decision.
What to do right now
Before your next loan application — or even if you're just thinking about one down the road — calculate your DSCR. Here's how:
Take your net operating income for the last 12 months. Divide it by your total annual debt payments including the new loan you're considering. If the number is below 1.25, you have work to do before you apply. If it's above 1.25, you're in the game.
Next issue we're going to talk about the second thing underwriters look at — and it has nothing to do with your financials.
— The Credit Desk