Every SBA deal I package starts with three years of tax returns. Most borrowers assume the bottom line on those returns is the number a lender will judge them on.
It isn’t. A lender looks at cash flow. Your tax return was built to do a different job.
Your Return Is Built to Lower Your Taxes
A good accountant uses every legitimate deduction to shrink your taxable income. That’s smart tax planning. It also makes your business look smaller than it really is.
Underwriters know this. So they rebuild the number, starting with net income and adding back expenses that don’t reflect what the business can actually pay.
The Standard Add-Backs
Every lender adds back depreciation and amortization. They’re non-cash expenses, so they never left your bank account.
Interest gets added back too. The lender is measuring your cash flow against the payments on the new loan, not the debt you’re carrying today. If your business files as a C corporation, income taxes are added back for the same reason.
That gets you to EBITDA: earnings before interest, taxes, depreciation and amortization.
Owner Add-Backs: Where the Real Difference Is
Next come the owner add-backs. These are real expenses that benefit you personally and won’t continue under new ownership.
Here’s a typical example. A return shows $150,000 in net income. The business also pays $12,000 a year for the owner’s personal vehicle, counting the lease, fuel and insurance. It covers the owner’s family health insurance at $8,400. And the owner takes $120,000 in salary for a role that pays about $85,000 in that market.
Those items add $55,400. The $150,000 becomes $205,400, and that’s before interest and depreciation are added back.
What Doesn’t Hold Up
Underwriters use one test. Would a new owner still pay this expense? If the answer is yes, it stays in.
Market-rate rent stays in. If you own the building and charge your business more than market rent, only the excess can come back. The meals and travel that actually run the business stay in as well.
A one-time legal bill can add back if you can show it won’t repeat. An open lawsuit is a different story. The lender will want to know how it ends before counting anything.
Paper Behind Every Number
An add-back without documentation is just a claim. When I submit one, the proof goes with it: lease and fuel records for the vehicle, premium statements for the insurance, salary data for your market.
Underwriters accept add-backs they can verify. They cut the rest.
How the Math Decides Your Loan
Once the underwriter has your adjusted EBITDA, they divide it by the annual payments on the loan you’re requesting. That’s your debt service coverage ratio, or DSCR.
Most lenders I work with want to see 1.25x or better. Say a deal comes in at 1.10x on the raw tax return. It gets declined. Document the add-backs properly and the same deal can reach 1.35x. Nothing about the business changed. The paperwork did.
Why I Do This First
I run these numbers in the first conversation, not month three. Your add-backs help set your maximum loan amount, and knowing that early tells you which deals are worth chasing.
If you’re buying a business or refinancing the one you own, text me your last three years of returns at (214) 726-9000. I’ll show you what your real cash flow looks like before you spend a dollar on the deal.