Debt Service Coverage Ratio Calculator
Calculate the Debt Service Coverage Ratio (DSCR) to assess your ability to service business debt from operating income. Lenders require minimum DSCR of 1.25x for most business loans.
🏦 Finance💼 DSCR = Net Operating Income / Annual Debt Service
Annual net operating income ($)
Annual debt payments (principal + interest) ($)
Please enter valid values.
Formula & Reference
| Variable | Formula | Units |
|---|---|---|
| Debt Service Coverage Ratio Calculator | DSCR = Net Operating Income / Annual Debt Service | ratio |
Step-by-Step Examples
Example 1
Healthy Business Loan
$200k NOI, $120k annual debt service.
- DSCR: $200k/$120k = 1.67x
- Strong - most lenders want 1.25x minimum
- Annual surplus: $80k
✓ 1.67x DSCR - strong
Example 2
At Minimum Threshold
$150k NOI, $120k debt service.
- DSCR: 1.25x - exactly at common lender minimum
- $30k annual surplus - thin but meeting requirements
✓ 1.25x DSCR - at minimum
Example 3
Below Lender Threshold
$100k NOI, $120k debt service.
- DSCR: 0.83x - below 1.0x
- Business cannot cover debt service from operations
- Lender will likely require remediation plan or collateral
✓ 0.83x DSCR - below threshold
Real-World Applications
SBA Loans
SBA 7(a) and 504 loans typically require minimum 1.25x DSCR.
Commercial Real Estate
CRE lenders use DSCR to evaluate property loan repayment capacity.
Business Finance
DSCR is a core covenant in most commercial lending agreements.
Acquisition Finance
Buyers model DSCR when structuring leveraged business acquisitions.
Common Mistakes to Avoid
⚠️
Using EBITDA instead of NOI as the numerator
Lenders use Net Operating Income (after taxes, before debt service). Using EBITDA overstates true debt service capacity by excluding taxes.
⚠️
Forgetting to include all debt obligations
DSCR covers all debt service: existing loans, new loan, lease obligations, and any other required principal/interest payments.
⚠️
Not stress-testing DSCR for revenue fluctuations
Lenders and prudent borrowers model DSCR under different revenue scenarios. A 20% revenue decline shouldn't breach loan covenants.
Frequently Asked Questions
What DSCR do lenders require? ▾
Most conventional business lenders require 1.25x minimum. SBA loans: 1.25x. Commercial real estate: 1.20-1.30x. Some lenders require 1.50x for higher risk loans.
How do I improve my DSCR? ▾
Increase operating income (revenue growth, cost reduction), pay down existing debt to reduce debt service, refinance to lower interest rate, or extend loan term to reduce annual principal payments.
What is Net Operating Income (NOI)? ▾
Revenue minus operating expenses before debt service, taxes, depreciation, and amortization. For DSCR purposes, NOI represents cash available to service debt.
Can a business get a loan with DSCR below 1.25x? ▾
Possible with strong collateral, personal guarantee, SBA guarantee, or as part of a turnaround situation - but at higher rates and more restrictive terms.
How often is DSCR tested in loan covenants? ▾
Typically quarterly or annually in loan agreements. Breaching the minimum covenant triggers a default notice, requiring corrective action or renegotiation with the lender.