Debt service coverage ratio (DSCR)
Also called: DSCR
The debt service coverage ratio (DSCR) measures whether a business earns enough to cover its debt payments, calculated as net operating income divided by total debt service.
Lenders use DSCR to gauge repayment capacity. A DSCR of 1.0 means income exactly covers debt payments. Above 1.0 means a cushion, and below 1.0 means the business does not currently earn enough to cover its obligations.
Many lenders look for a DSCR of about 1.25 or higher, meaning the business earns 25 percent more than it needs to service its debt. Improving DSCR usually comes down to raising net operating income or reducing existing debt before you apply.
Common questions
What is a good DSCR?
Many lenders prefer a DSCR of 1.25 or higher, though requirements vary by lender and product.
How do you calculate DSCR?
Divide net operating income by total debt service, which is the principal and interest due over the period.
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