How to Calculate Debt Service Coverage Ratio

The short answer

Debt service coverage ratio (DSCR) compares the cash your business generates to the debt payments it must make. Divide annual cash flow available for debt service by total annual debt service. A DSCR above 1.00x means the business earns more than its payments; below 1.00x means it doesn't. Lenders use DSCR to decide how much you can borrow, and it is often the single most important number in a business loan file.

Step 1: Calculate cash flow available

Most business lenders start with net income from your tax return and add back non-cash and financing expenses. This approximates EBITDA (earnings before interest, taxes, depreciation and amortization). Lenders may also accept documented one-time expenses or an owner's above-market salary, and they may subtract a reasonable owner draw or distributions.

Step 2: Calculate annual debt service

Debt service is all scheduled principal and interest payments over a year — existing loans, equipment financing, vehicle loans, real estate debt and the new loan you're requesting. Use the loan payment formula for the proposed loan.

Step 3: Divide

Divide Step 1 by Step 2. Express the result as a multiple with an x — 1.35x means $1.35 of cash flow for every $1.00 of payments.

Worked example (hypothetical)

• Net income: $165,000
• Add back interest $18,000, depreciation $34,000, amortization $3,000
• One-time legal expense (documented): $10,000
• Cash flow available: $165,000 + $18,000 + $34,000 + $3,000 + $10,000 = $230,000
• Existing equipment loan: $2,100/month × 12 = $25,200
• Proposed loan: $750,000 at 10% over 10 years ≈ $9,911/month × 12 = $118,935
• Annual debt service: $25,200 + $118,935 = $144,135
• DSCR = $230,000 ÷ $144,135 ≈ 1.60x

What is a good DSCR?

There is no universal number; each lender and program sets its own. As a general guide:

• Below 1.00x — cash flow doesn't cover payments; very difficult to finance
• 1.00x–1.15x — thin; any dip in revenue creates trouble
• 1.15x–1.25x — the minimum range many business lenders cite
• 1.25x–1.50x — generally comfortable for many lenders
• Above 1.50x — strong coverage and more negotiating room

Reverse it: how much can you borrow?

Lenders often work backward from a target DSCR to find the maximum payment your cash flow supports.

Reverse example (hypothetical)

• Cash flow available: $230,000; target DSCR: 1.25x
• Maximum annual debt service: $230,000 ÷ 1.25 = $184,000
• Minus existing payments of $25,200 = $158,800 available, or ≈ $13,233/month
• At 10% over 10 years, that payment supports a loan of about $1,000,000

Common DSCR mistakes

• Using revenue or bank deposits instead of cash flow
• Leaving out existing loans, leases treated as debt or personal debt the business pays
• Adding back expenses that will recur, like normal repairs
• Ignoring the owner's living expenses when the business is the only income
• Using a teaser rate instead of a realistic or stressed rate

How to raise your DSCR

• Extend the term: the same loan over 10 years instead of 7 lowers the annual payment
• Borrow less by adding equity
• Refinance high-payment short-term debt into longer terms
• Document legitimate add-backs with invoices and statements
• Show improving year-to-date results with clean interim financials

Stress-test your DSCR before a lender does

Lenders often ask what happens if revenue falls or, on a variable-rate loan, if rates rise. Run the same calculation with a lower cash flow and a higher rate to see how much room you have.

• Revenue down 10%: if cash flow falls from $230,000 to $200,000, DSCR = $200,000 ÷ $144,135 ≈ 1.39x
• Rate up 2 points: the $750,000 loan at 12% over 10 years ≈ $10,760/month, so debt service ≈ $154,325 and DSCR ≈ 1.49x
• Both at once: $200,000 ÷ $154,325 ≈ 1.30x — still above a 1.25x target in this hypothetical
• If a mild stress pushes you below your lender's minimum, consider a longer term or smaller loan now

Common questions

Sources

• SBA: 7(a) loans — uses, maximum amount and eligibility
• SBA: Fund your business
• SBA: SOP 50 10 — Lender and Development Company Loan Programs