Debt Service Coverage Ratio (DSCR)

A lending metric measuring a business's ability to pay its debt obligations, calculated as cash flow divided by total debt service. SBA loans typically require 1.25x minimum.

Debt Service Coverage Ratio (DSCR) measures a company's ability to service its debt obligations from operating cash flow.

DSCR Formula

DSCR = Net Operating Income / Total Debt Service

Where:
- Net Operating Income ≈ EBITDA - CapEx - Taxes
- Total Debt Service = Principal + Interest payments

DSCR Requirements

Lender TypeMinimum DSCR
SBA 7(a)1.15-1.25x
Conventional bank1.25-1.50x
Mezzanine/subordinated1.00-1.15x

DSCR Example

EBITDA:                 $1,000,000
Less: CapEx              ($50,000)
Less: Taxes             ($150,000)
= Cash for Debt Service:  $800,000

Annual Debt Service:      $600,000 (P+I)

DSCR = $800K / $600K = 1.33x ✓

Why DSCR Matters

  • Loan approval: Banks won't lend below minimum DSCR
  • Deal sizing: Higher DSCR = more debt capacity
  • Covenant compliance: Ongoing DSCR requirements in loan agreements
  • Risk assessment: Lower DSCR = less cushion for downturns

Improving DSCR

  1. Increase earnings (higher EBITDA)
  2. Extend loan terms (lower annual payments)
  3. Negotiate lower interest rates
  4. Reduce non-essential CapEx

Related Terms

sba loanebitdacash flow

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