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Glossary

What is Debt Service Coverage Ratio (DSCR)?

Also called: DSCR, coverage ratio, debt coverage

In one sentence: Cash available to pay debts, divided by the debt payments due in the same period; above 1.0x there is a cushion, and lenders want margin above their own minimum.

Last updated · Precise SBA editorial

In plain English

DSCR compares the cash a business produces with the debt payments it owes. If the cash is bigger than the payments, the ratio is above 1.0x and there is a cushion. If it is smaller, the business cannot pay its debts from its own cash.

The formula

DSCR = cash available for debt payments ÷ debt payments due in the same period (usually a year).

  • Cash available starts from net income and is adjusted: lenders add back non-cash and non-continuing items, and deduct what the business must spend to keep running. See add-backs and the step-by-step in how lenders calculate cash flow.
  • Debt payments are principal and interest on the new loan plus any debt that continues after closing. Debt being refinanced is not counted twice.

How lenders use it

The SBA sets floors of 1.15x in general and 1.25x for most changes of ownership; each lender may set its own higher minimum and prefers margin above it, so ask your lender what it uses. Lenders usually test two versions and rely on the lower: business DSCR, and global DSCR, which adds the owner’s household.

Hypothetical example

A business has $300,000 of cash available and $200,000 of yearly debt payments: 1.50x. If cash flow falls 20% to $240,000, the ratio drops to 1.20x, with the same payments. The margin shrank faster than the cash flow did, which is why lenders like cushion.

Common mix-ups

  • DSCR is not profit margin. A profitable business can still have weak coverage if it carries a lot of debt.
  • “Cash available” is a judgment, not a line on the tax return. Two lenders can get different numbers from the same return, because they accept different add-backs and assume different owner pay.
  • A passing ratio is not an approval. Credit history, collateral, liquidity and the deal itself matter too.

What to do with it

Run your own numbers in the acquisition and cash-flow calculator, which shows both versions and stresses them.

Common questions

What is a good DSCR?

Higher is better, and lenders want a cushion above their own minimum. The minimum depends on the lender and the deal, so ask. As arithmetic, 1.0x means the cash exactly covers the payments, and anything under it means it does not.

Is DSCR the same as interest coverage?

No. Interest coverage counts only interest. DSCR counts principal and interest, which is the full payment the business has to make.

Can DSCR be below 1.0x?

Yes. It means the cash flow does not cover the payments. Lenders will not usually lend into that without a structural change, such as less debt, more cash in, or higher cash flow.

Related terms

Global Cash FlowA combined view of the business and the owner’s household that tests whether all income can cover all debt payments, business and personal.Add-BacksExpenses added back to reported earnings because they are non-cash, will not continue after a deal, or are personal to the current owner.Sources and UsesA table of what a project costs in total (uses) and where each dollar comes from (sources), which must match.

Go deeper

How Lenders Calculate Cash Flow and DSCR, Step by StepFrom net income to a coverage ratio in five steps, with every number shown. This is the math behind most acquisition and expansion loan decisions.What SBA Lenders Look At: DSCR and Global Cash Flow in Plain EnglishLenders mostly ask one question: is there enough cash to make every payment, with room to spare? Answering it takes two views, the business and you.

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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.