Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.

What is a debt service coverage ratio (DSCR) and why is it important to business lenders?

Learn how your DSCR can determine what kind of loan you're eligible for.

Factors such as your credit history, business assets and debt service coverage ratio play an important role in helping lenders decide whether you’re a risky investment or not — but it’s impossible to know which factor a lender will care about the most. Learn what a debt service coverage ratio, or DSCR, is and why it’s important in our guide below.

What is the debt service coverage ratio?

The debt service coverage ratio (DSCR) — also called a debt coverage ratio (DCR) — is an industry measure of the cash income a business has leftover at the end of the month that can be used to service its debt (including principal, interest and lease payments).

A high DSCR means you have a substantial amount of money leftover at the end of the month after all of your expenses have been payed – money you could put towards loan repayments if you got a new loan. A low DSCR means you’re just barely meeting your expenses by the end of the month, with very little money leftover

How does your DSCR impact your loan eligibility?

Any time you apply for a loan at a bank or any other traditional financial institution, the lender will use your DSCR to decide whether your business will be able to manage its repayments. The higher your debt service coverage ratio, the better.

Simply put, the DSCR is one of the main benchmarks used to determine your ability to make repayments. If your business isn’t generating the income it needs to pay its debt and make repayments – meaning your DSCR is low – then a lender will likely decline your loan application.

How do lenders view your debt service coverage ratio?

Your business’ DSCR is immensely important to the process of applying for a business loan. Although other factors such as credit history, time in business and loan collateral will be considered as part of your loan application, if your ratio is too low, you’ll likely be denied for the loan altogether.

In general, a ratio of 1.2 is the minimum debt service coverage ratio that a lender is willing to accept. However, depending on the type of industry your business operates in, your lender may have a higher or lower minimum ratio.

How do you calculate your debt service coverage ratio?

To calculate your debt service coverage ratio, use the following calculation:

Your debt service coverage ratio (DSCR) = Annual business operating income ÷ Total annual debt service level (principal and interest you must repay in a given year)

Lenders may use different figures when assessing your operating income. Some will use EBITDA (earnings before interest, taxes, depreciation and amortization), while others will add net operating income to depreciation and any other non-cash charges. As a result, the DSCR figure won’t be the same across all lenders, which can make direct comparison difficult. Some also express the DSCR as a percentage rather than a ratio.

Working out your debt service coverage ratio

To illustrate how the DSCR works, let’s assume your business has a total annual net operating income of $80,000 and you’re applying for a loan with an annual debt service of $30,000 (including annual interest payments). Let’s say you also already have a long-term loan you’re currently paying off at $40,000 of annual debt service.

So, you’ll need to factor in both the loan you’re applying for and the loan you already have – bringing your total annual debt service to $70,000. To calculate your DSCR, take your annual net operating income of $80,000 and divide it by your annual debt service of $70,000.

DSCR = Annual business operating income ÷ Total annual debt service level (principal and interest you must repay in a given year)
DSCR = $80,000 ÷ $70,000
DSCR = 1.14

This would equal a DSCR of 1.14, a low ratio that would likely prevent your application from being accepted. This essentially means you’d have $1.14 to pay off every $1 you’d owe in debt – which means you’d be leftover with $0.14 after paying every $1 in debt.

Keep in mind that if you’re able to use future financial projections to convince the lender that your second loan would increase your income/profits to boost your DSCR enough, then you could be accepted.

Compare business loans

After calculating your debt service coverage ratio, you may find that your DSCR is high enough to try applying for a business loan. In that case, use our helpful list of business loan providers below to compare your options.

Name Product Interest Rate Loan Amount Loan Term Minimum Revenue Minimum Time in Business Loans Offered
SharpShooter Funding Business Loan
Prime pricing from 9.00%
$500 - $250,000
6 - 120 months
$10,000 /month
100 days
Unsecured Term, Merchant Cash Advance, Invoice Factoring
To be eligible, you must have been in business for at least 100 days with a minimum of $10,000 in monthly deposits.

SharpShooter provides capital to small businesses that are underserved by banks and credit unions. It measures overall business health and potential rather than focusing strictly on traditional metrics. Fill out a simple application and get pre-approved in minutes. Receive your funds within 24 hours.
Swoop Funding Business Loan
4.00% - 25.00%
$1,000 - $5,000,000
3 - 60 months
$10,000 /month
24 months
Term, MCA, LOC & more
To be eligible, you must have been in business for at least 24 months and have a minimum of $100,000 in annual revenue.

Swoop partners with banks and alternative lenders to match your business with the right funding options. Register for free and browse your offers without affecting your credit score.
Lending Loop Business Loan
Starting at 4.96%
$10,000 - $500,000
3 - 60 months
$8,500 /month
12 months
P2P
To be eligible, you must have been in business for at least 12 months and have a minimum of $100,000 in annual revenue.

Lending Loop is Canada’s first regulated peer-to-peer lending platform. Complete an application in 5 minutes. Once you accept your loan offer, investors will begin to fund your loan on the marketplace. Your loan will be transferred to your bank account when it is fully funded.
OnDeck Business Loan
8.00% – 29.00%
$5,000 - $300,000
6 - 18 months
$10,000 /month
6 months
Secured Term, Line of Credit, Merchant Cash Advance
To be eligible, you must have been in business for at least 6 months with a minimum monthly revenue of $10,000.

OnDeck offers fast and simple financing. Apply in less than 10 minutes with your basic business information and see your loan offers without hurting your credit score. Get approved within 1 business day, and choose your term, amount and payback schedule once approved.
Loans Canada Business Loan
Prime Pricing from 9.00%
$2,000 - $350,000
3 - 60 months
$4,166 /month
100 days
Unsecured Term
To be eligible, you must have been in business for at least 100 days, have a credit score of 410+ and show a minimum of $4,166 in monthly deposits ($50,000/year).

Loans Canada connects Canadian small business owners to lenders offering financing up to $350,000. Complete one simple online application and get matched with your loan options.
loading

Compare up to 4 providers

Bottom line

You should always be careful of getting into too much debt, whether it’s personal or business related. But when your business is in need of cash, being fully aware of the debt service coverage ratio and how it factors into the decision-making process of a lender will help better prepare you when applying for a business loan.

Frequently asked questions about DSCR

More guides on Finder

Ask an Expert

You must be logged in to post a comment.

Go to site