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Debt service coverage ratio DSCR
Also called coverage ratio, DSC.
Cash available for debt payments divided by the payments due in the same period; above 1.0 means the cash covers the obligations with something left over.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
The numerator is cash flow available for debt service, usually built from net income with depreciation, amortization, interest and any documented non-recurring items added back. The denominator is total scheduled principal and interest for the period, including the facility being applied for.
A global version adds the guarantor's personal income and personal obligations to the calculation, on the reasoning that an owner-guaranteed business and its owner draw on one pool of cash. SBA credit memos are built this way, as are most bank files on closely held companies.
Minimum thresholds are set by SBA policy for guaranteed loans and by internal credit policy at every lender, and they move. They also differ by industry and by whether the collateral is real estate or equipment. Ask the lender what its threshold is rather than assuming an industry standard exists.
Where this one catches people
The ratio is only as good as the numerator, and the numerator is a set of judgment calls about add-backs. An owner who adds back a salary they will keep drawing, or a lease they will keep paying, produces a coverage ratio the business cannot actually deliver. Any add-back that recurs next year is not an add-back.
Worked through
Cash flow available for debt service of $180,000 against existing annual payments of $120,000 gives 1.50x. Add a proposed loan with $45,000 of annual payments and the denominator becomes $165,000, producing 1.09x. Whether that clears depends on the individual lender's policy.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
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180,000 of cash flow against 120,000 of debt service is 1.50x, falling to 1.09x once a 45,000 proposed payment is added
example180,000 / 120,000 = 1.500. 120,000 + 45,000 = 165,000; 180,000 / 165,000 = 1.0909, i.e. 1.09x. The entry correctly declines to assert a market-standard threshold, pointing to lender policy instead.
Debt service coverage ratio — common questions
What does debt service coverage ratio mean?
Cash available for debt payments divided by the payments due in the same period; above 1.0 means the cash covers the obligations with something left over.
Where does debt service coverage ratio catch people out?
The ratio is only as good as the numerator, and the numerator is a set of judgment calls about add-backs. An owner who adds back a salary they will keep drawing, or a lease they will keep paying, produces a coverage ratio the business cannot actually deliver. Any add-back that recurs next year is not an add-back.
Is debt service coverage ratio the same as an interest rate?
Debt service coverage ratio is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does debt service coverage ratio apply to?
Term Loan, SBA Loan, Equipment Financing, Asset-Based Lending.
Is there a worked example of debt service coverage ratio?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside debt service coverage ratio?
Add-back, Debt schedule, Debt service, EBITDA, Global cash flow analysis.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.