What is the debt service coverage ratio (DSCR)?

How lenders use it

DSCR is the main test of whether a business can afford a loan from its trading. Credit teams work it out for the new loan on top of the debts the business already has. They also run it for the past year and for a downside case.

Most lenders start from EBITDA in the latest accounts and take out one-off items. They add up a year of interest and repayments on every existing loan and lease, plus the first twelve months of the new loan. The two figures must cover the same period.

Lenders set a minimum. A common range is 1.2 to 1.5, but it depends on the lender, the product and the risk. A seasonal or volatile business may need a higher ratio.

The ratio is only as good as its inputs. The credit team checks that the EBITDA is real and that the debt list matches the bank statements. A payment on the statements that is not on the applicant's list lowers the ratio.

Worked example

Example only. A business earns EBITDA of £300,000. It already pays £80,000 a year on existing loans. The new loan adds £160,000 a year. Total debt service is £240,000.

The DSCR is 300,000 divided by 240,000, which is 1.25. If EBITDA falls 10% to £270,000, the ratio drops to 1.125. A lender with a 1.2 minimum would then want a smaller loan or a longer term.

Common confusions

In US property investing, a DSCR loan is a loan sized on the rent a property earns against its mortgage payments, with little review of the owner's personal income. The word is the same, but the product and the inputs are different.

DSCR is not interest cover. Interest cover divides earnings by interest only. DSCR includes repayments of principal, so it is a tighter test.

DSCR is not the fixed charge coverage ratio. FCCR also takes out capital spending and taxes and sometimes counts rent.

Questions lenders ask

How do I use a DSCR calculator?

Enter the yearly cash flow, the loan amount, the rate and the term. Add the payments on existing debt. The calculator divides cash flow by total payments and can also show the largest loan that meets your target ratio.

What is a good DSCR for a business loan?

Above 1.0 means the business covers its payments. Lenders often ask for 1.2 to 1.5. Riskier or more seasonal businesses face higher minimums. Each lender sets its own policy.

Which cash flow figure goes in a DSCR?

Most lenders use EBITDA from the latest accounts, adjusted for one-off items. Some use net operating income or cash flow available for debt service. The credit policy should say which one, and the lender should apply it the same way each time.

What does a DSCR below 1.0 mean?

The business does not make enough cash to pay its debt. It would need savings, new money or help from an owner or guarantor to keep paying. Most lenders decline or restructure the loan.

Fixed charge coverage ratio: Cash left after costs against fixed payments
Cash flow lending: Lending against earnings, not against assets
Working capital loan: Short-term funding for day-to-day costs
Five Cs of credit: Five headings a credit team uses to judge a loan

This page is general information for lenders. It is not legal, tax or credit advice.