DSCR Explained: Debt Service Coverage Ratio
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DSCR (Debt Service Coverage Ratio) measures your ability to pay debt obligations from operating income. Most lenders require 1.25x or higher, meaning you generate $1.25 in income for every $1 in debt payments.
How to calculate DSCR
Formula: Net Operating Income ÷ Total Debt Service
- Net Operating Income: Revenue minus operating expenses (before interest, taxes, depreciation)
- Total Debt Service: Principal + interest payments on all debts
Example calculation
- Monthly revenue: $50,000
- Operating expenses: $30,000
- Net Operating Income: $20,000
- Monthly debt payments: $15,000
- DSCR: $20,000 ÷ $15,000 = 1.33x
Lender requirements
- Bank loans: Usually 1.25x minimum
- SBA loans: 1.15x minimum
- Equipment financing: Often 1.20x minimum
- MCAs: May not require DSCR (based on cash flow instead)
How to improve your DSCR
- Increase revenue: New customers, higher prices, additional services
- Reduce expenses: Cut unnecessary costs, negotiate better rates
- Refinance debt: Lower interest rates or longer terms
- Pay down debt: Reduce principal balances
Why DSCR matters
Lenders use DSCR to assess risk. Higher ratios mean lower risk and better loan terms. If your DSCR is below requirements, consider MCA or revenue-based financing as alternatives.