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Glossary

What is Debt Service?

Also called: annual debt service, debt payments, P&I

In one sentence: The total principal and interest a borrower must pay on its debts over a period, usually a year; the denominator in a debt service coverage ratio.

Last updated · Precise SBA editorial

In plain English

Debt service is what it costs each year to keep current on your debts: every scheduled principal and interest payment, added up. When a lender asks whether a business can afford a loan, it compares the cash the business produces with its debt service. That comparison is the debt service coverage ratio.

What’s included

For an acquisition, lenders look at total debt service after the deal:

  • Payments on the new loan.
  • Payments on any other business debt that stays in place.
  • Payments on a seller note, unless it’s on full standby.
  • Equipment loans and, by lender policy, some leases.

Under the current SBA rules for a change of ownership, historical coverage is EBITDA divided by the combined debt service after the transaction, and any additional purchase debt with interest-only payments that isn’t on full standby is tested as if it amortized over no more than ten years.

For a household view, global debt service adds the owners’ personal debts: mortgage, car loans, student loans, cards. See global cash flow.

Hypothetical example

After a purchase, a business owes: $168,000 a year on the new acquisition loan, $24,000 a year on an existing equipment loan, and $36,000 a year on a paying seller note. Total debt service: $228,000. If cash available for debt service is $300,000, coverage is $300,000 / $228,000, about 1.32x. Put the seller note on standby and debt service falls to $192,000, raising coverage to about 1.56x.

Common mix-ups

  • Debt service is not the loan balance. It’s the yearly payment.
  • Interest-only periods don’t make principal disappear. Lenders look through them.

What to do with it

List every debt and its annual payment before you talk to a lender, then follow the full method in how lenders calculate cash flow.

Common questions

Does debt service include interest only, or principal too?

Both. Debt service is the full scheduled payment: principal and interest. A loan with interest-only payments still has principal to repay, and lenders account for that.

Is a seller note part of debt service?

A seller note that makes payments is. A note on full standby, with no payments while the SBA loan is outstanding, is left out while it's on standby, which is why standby notes help coverage.

What about leases and lines of credit?

Lenders handle these by policy. Equipment leases and term debt are usually included; a line of credit may be included at an assumed payment. Ask how your lender treats them.

Related terms

Debt Service Coverage Ratio (DSCR)Cash available to pay debts, divided by the debt payments due in the same period; above 1.0x there is a cushion, and lenders want margin above their own minimum.Global Cash FlowA combined view of the business and the owner’s household that tests whether all income can cover all debt payments, business and personal.Standby Seller NoteSeller financing in which the seller agrees not to be paid for a set period and ranks behind the bank loan, so it does not draw on the buyer’s cash flow.

Go deeper

How Lenders Calculate Cash Flow and DSCR, Step by StepFrom net income to a coverage ratio in five steps, with every number shown. This is the math behind most acquisition and expansion loan decisions.What SBA Lenders Look At: DSCR and Global Cash Flow in Plain EnglishLenders mostly ask one question: is there enough cash to make every payment, with room to spare? Answering it takes two views, the business and you.

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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.