The DSCR formula
DSCR equals net operating income divided by total debt service. Debt service is all principal and interest payments due in the period.
The formula is simple:
DSCR = Net operating income / Total debt service
Net operating income here is usually earnings before interest, taxes, depreciation and amortization, adjusted for owner compensation in some cases. Total debt service includes the annual principal and interest on all business loans, leases and other fixed debt obligations.
Lenders define the pieces a little differently. Some add back owner salaries or one-time expenses. Others subtract owner draws and taxes. Ask each lender how it calculates the ratio, and calculate it their way when applying.
A ratio of 1.0 means income exactly covers payments. Below 1.0, the business does not earn enough to pay its debts from operations.
A worked example with round numbers
If a business earns $150,000 in net operating income and owes $100,000 a year in debt payments, its DSCR is 1.5.
This is an illustrative example. A landscaping company has annual revenue of $900,000. After operating costs, its net operating income is $150,000. It has a term loan with $60,000 in yearly payments and an equipment loan with $40,000 in yearly payments.
- Total debt service: $60,000 + $40,000 = $100,000
- DSCR: $150,000 / $100,000 = 1.5
That means the business earns $1.50 for each $1.00 of debt payments. Now suppose the owner wants a new $30,000-a-year loan. Debt service rises to $130,000, and the DSCR falls to about 1.15. The company can still pay, but with a thin cushion if sales slip. Run this test before you borrow. Our guide on how much of revenue can go to loan payments adds a second view.
What lenders look for
Lenders usually want a DSCR comfortably above 1.0, since a ratio close to 1.0 leaves no room for a slow month. The required level differs by lender, loan and industry.
Many traditional lenders and SBA lenders look for a ratio of at least a modest cushion above 1.0, and some set their own minimum in the loan policy. Because standards vary, ask your lender for its number rather than assuming one.
Higher-risk industries or smaller businesses may be asked for more cushion. Stable, contract-based revenue may be accepted with less.
Online and alternative funders often focus more on bank deposits and daily or monthly cash flow than on a formal DSCR. They may check that payments fit within a share of your revenue. Either way, the question is the same: can the business pay without strain? SBA lenders review it closely; see SBA loan requirements.
Business DSCR vs. global DSCR
Business DSCR looks only at the company's cash and debts. Global DSCR combines the business and the owner's personal income and obligations.
For sole proprietors and closely held companies, lenders often calculate a global DSCR. It adds the owner's personal income and subtracts living expenses and personal debt payments, such as a mortgage or car loan, on top of the business figures.
This matters because the business may be the owner's only income source. A company with a strong DSCR can still look weak on a global basis if the owner carries heavy personal debt.
Gather the documents lenders usually request: business and personal tax returns, profit and loss statements, a debt schedule and bank statements. A tidy debt schedule that lists each loan, balance, payment and maturity date saves time. See the guide to business debt.
How to improve your DSCR
Raise net operating income, lower debt payments, or both. Refinancing, paying off small loans and trimming costs all help.
Levers on the income side:
- Raise prices where customers will accept it
- Cut costs that do not produce sales
- Improve collections so cash arrives sooner
- Add profitable revenue lines
Levers on the debt side:
- Pay off small loans with the highest payments relative to balance
- Refinance into longer terms to lower the payment, understanding that total cost may rise
- Avoid taking new debt just before applying for a larger loan
Read how to calculate the cost of debt and refinancing business debt with an SBA loan when you weigh these choices.
Using DSCR before you borrow
Test any new payment against your own DSCR and your cash flow. If the ratio falls near 1.0, the debt is too heavy for your income.
Before signing, convert any offer into a yearly payment, add it to current debt service, and recalculate. Then stress test: what if revenue drops 15 percent for three months? If the ratio drops below 1.0 in that case, you need either a smaller amount, a longer term or a plan for the lean period.
ROI Funder works backward from what the money will produce. We show the true cost, payback period and monthly-equivalent payments before you sign, so you can run this test on a real offer. We consider businesses with 6+ months in operation, $20,000+ in monthly revenue and 500+ FICO. Products such as term loans have fixed payments that are simple to put into the formula, while revenue-based financing payments rise and fall with sales. Applying uses a soft credit pull.
Frequently asked questions
What is a good DSCR?
A ratio above 1.0 means income covers debt payments. Lenders often want a cushion above that, and the exact minimum differs by lender and loan type.
How do you calculate DSCR?
Divide net operating income by total debt service, which is all principal and interest payments due in the period.
What happens if my DSCR is below 1.0?
It means operating income does not cover debt payments. Lenders may decline, ask for a smaller amount or require more collateral or a stronger guarantor.
Do all lenders use DSCR?
Banks and SBA lenders use it heavily. Many online funders focus more on bank deposits and revenue, though the underlying question of affordability is the same.