The short answer
Debt service coverage ratio (DSCR) = annual cash flow available for debt payments ÷ annual debt payments. A DSCR of 1.25x means the business earns $1.25 for every $1.00 of loan payments.
Why lenders care
DSCR shows whether the business can make its payments with room to spare. Many commercial lenders look for roughly 1.20x–1.35x or better, but every lender and loan program sets its own requirement.
What counts as cash flow
Lenders usually start from net income and add back interest, depreciation and amortization, and sometimes one-time or owner-discretionary expenses. What they'll accept as an add-back varies — document every one.
Worked example
A business has $240,000 of cash flow and is considering a $600,000 loan at 9% over 10 years. The payment is about $7,600 a month, or $91,200 a year. DSCR = $240,000 ÷ $91,200 ≈ 2.6x. Add $60,000 of existing annual payments and DSCR falls to about 1.6x.
How to improve DSCR before applying
- Borrow less or put in more equity
- Choose a longer term where the asset supports it
- Pay off or refinance expensive short-term debt
- Clean up financial statements so legitimate add-backs are clear
Estimates only. Results vary. No guarantee of approval, rates or savings.
Examples use hypothetical numbers. Educational content, not financial, legal or tax advice. Profit Theory is not a lender; lenders set their own requirements and make all credit decisions.