Which funding products does this apply to?

Term Loan, Business Line of Credit. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.

Are the figures here quotes?

No. Every worked example is labelled illustrative and exists to show the arithmetic. What a particular lender charges is on that lender's page, where it publishes it at all.

The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.

How do I know a figure here is right?

Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.

Are the examples real deals?

No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.

Why do you never say what a typical rate is?

Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.

Is this financial or legal advice?

No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.

Can I reuse this content?

Quote a paragraph with a link back. Do not republish whole articles.

Debt service coverage ratio: how lenders actually compute it

What a lender means by debt service coverage, and how they compute it

The ratio is simple. The two numbers that go into it are not, and almost every argument between a borrower and a credit analyst is really an argument about an add-back.

By Find Me Funders research desk Updated 14 September 2026 972 words 4 min read

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

Debt service coverage is cash available divided by debt payments due. If the answer is 1.00 the business generates exactly enough to make its payments and nothing else. Credit policies generally require a cushion above 1.00, and the size of that cushion varies by institution, by product and by how the lender views the industry.

The formula is the easy part. Everything contested lives in the numerator.

Building the numerator

Most commercial lenders start from net income on the tax return or reviewed financials and add back items that reduced reported profit without consuming cash, or that the lender treats as available.

Depreciation and amortisation.Non-cash charges. Added back with no argument. See EBITDA.

Interest expense.Added back, because interest is part of the debt service you are dividing by. Leaving it in the numerator would double-count.

One-time and non-recurring items.A legal settlement, a fire loss, a start-up cost that will not repeat. Add-backs here are negotiated. Lenders generally want documentation and an explanation of why the item cannot recur.

Owner compensation and distributions.The most contested item. If the owner takes $180,000 out of a business that could run with a $95,000 manager, some lenders add back the excess as discretionary. Others add back none of it, on the view that the owner will keep taking it. Practice differs widely between institutions, and between an underwriter looking at a closely held company and one looking at a sponsor-backed business.

Rent paid to a related party.If the operating company pays above-market rent to an entity the owner also controls, that spread may be added back — or the lender may consolidate the two entities and look at global cash flow instead. See global cash flow analysis.

Building the denominator

Annual principal and interest on every obligation the business must service over the next twelve months. That means:

Existing term loan payments, principal and interest
The proposed new loan's payments
Capital lease payments
The current portion of any other long-term debt
Interest on lines of credit, and in some policies an assumed amortisation of the outstanding line balance

Two frequent omissions cause real problems. Short-term products with daily or weekly debits often do not appear in a debt schedule the borrower prepares from memory, but they appear in the bank statements, and an analyst who finds them there and not on your schedule has learned something about you as well as about the numbers. Merchant advances are a particular case: they may be documented as purchases of receivables rather than loans, but the cash leaves daily regardless, and most credit policies treat the outflow as debt service for coverage purposes.

Illustrative only — a request that lands just short

Illustrative only — assume net income of $58,000, depreciation of $34,000 and interest expense of $22,000, giving cash available for debt service of $114,000. Existing annual debt service is $46,000. The request is a new $250,000 term loan over 84 months at a fixed 9% nominal rate, which produces a payment of $4,022.27 a month, or $48,267.23 a year.

Total debt service becomes $94,267.23. Coverage is $114,000 ÷ $94,267.23 = 1.21.

If the credit policy in front of this file requires 1.25, the deal is short. It is short by a small amount: the business would need $117,834 of cash available instead of $114,000, a gap of $3,834.

That gap can close four ways, and it is worth knowing all four before the analyst suggests one.

A defensible add-back. If $30,000 of that year's expense was genuinely non-recurring and documented, cash available becomes $144,000 and coverage rises to 1.53. The documentation is what makes this work, not the assertion.
A smaller loan. At the same rate and term, the coverage requirement supports a total debt service of $91,200, which leaves $45,200 a year for the new loan — about $234,000 of principal rather than $250,000.
A longer term. Stretching the amortisation lowers the annual payment and raises coverage, at the cost of more total interest and, often, a mismatch between the loan term and the useful life of what you bought.
Reducing existing debt service first. Paying off or refinancing a short-amortisation obligation can free more coverage than the new loan consumes.

Ratios that are not this ratio

Global DSCRadds the owner's personal income and personal debt payments to the calculation. Common for closely held businesses, and the reason a lender may ask for a personal financial statement and personal tax returns even for an entity loan.

Fixed charge coverageputs rent, and sometimes distributions and capital expenditure, into the denominator alongside debt. It is a harder test and appears more often as an ongoing covenant than as a sizing tool.

Current ratio and quick ratiomeasure liquidity, not coverage. A business can pass a coverage test and still run out of cash, which is the subject of working capital rather than debt service.

What to do with this before you apply

Compute your own coverage before anyone else does. Pull the last full year and the trailing twelve months, build the debt schedule honestly including every daily and weekly debit, and calculate the ratio at the loan size you want. If it lands below the level you think will be required, you have three options and one of them is not applying and hoping.

What underwriting generally looks at is coverage over at least one full year of history, often two, plus interim figures, plus a view on whether recent results are representative. A single strong quarter rarely carries a file. A clear, documented explanation of a bad one frequently does. Policy varies by institution, and the required cushion is one of the terms most likely to differ between two lenders looking at the same business.