What is DSCR? (Debt Service Coverage Ratio)
Learn what Debt Service Coverage Ratio means, how lenders calculate it, and what DSCR you need to qualify for business financing.
Debt Service Coverage Ratio (DSCR) measures whether your business generates enough cash flow to cover its debt payments. It is one of the most important metrics lenders use to evaluate your loan application.
How to Calculate DSCR
DSCR equals your Net Operating Income divided by your Total Debt Service. Net Operating Income is your revenue minus operating expenses (before interest and taxes). Total Debt Service includes all loan principal and interest payments.
DSCR Formula
DSCR = Net Operating Income / Total Debt Service. A DSCR of 1.0 means you generate exactly enough to cover payments. Above 1.0 means you have cushion; below 1.0 means cash flow shortfall.
DSCR Example
Suppose your business has $200,000 in annual Net Operating Income. Your current debt payments total $50,000 per year, and the new loan you want would add $100,000 in annual payments. Your pro forma DSCR would be:
$200,000 / ($50,000 + $100,000) = $200,000 / $150,000 = 1.33 DSCR
This means you generate $1.33 for every $1.00 in debt payments, providing a 33% cushion.
What DSCR Do Lenders Require?
Minimum DSCR requirements vary by lender and loan type:
- SBA loans: Typically 1.15 to 1.25 minimum
- Conventional bank loans: Usually 1.20 to 1.35
- Commercial real estate: Often 1.25 to 1.50
- Alternative lenders: May accept 1.0 or focus on other metrics
Why DSCR Matters
A healthy DSCR demonstrates that your business can handle the new debt without straining cash flow. Lenders view higher DSCR as lower risk because there is more margin for revenue fluctuations.
If your DSCR is borderline, you might still get approved but with higher interest rates, shorter terms, or additional collateral requirements.
Improving Your DSCR
If your DSCR falls short, consider these strategies before applying:
- Increase revenue or reduce operating expenses
- Pay down existing debt to reduce total debt service
- Request longer loan terms to lower annual payments
- Wait until business performance improves
Some lenders calculate DSCR using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) instead of Net Operating Income. Ask your lender which method they use.
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Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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