Our simple debt service coverage ratio calculator (DSCR) will help you understand your businesses ability to pay back its short-term debt obligations in cash.
Page written by Ian Hawkins. Last reviewed on May 23, 2024. Next review due March 1, 2025.
1. Monthly net operating income
Your net operating income is the income left after all your operating expenses are paid.
Your monthly operating income is:
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2. Monthly debt service cost
Your debt service cost is the dollar sum of all of your loan payments over one month.
Your monthly total debt service cost is
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DSCR = Monthly net operating income ÷ Monthly debt service cost
Monthly net operating income
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Monthly debt service cost
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Debt service coverage ratio:
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Debt service coverage ratio (DSCR) is one of the biggest financial ratios that loan providers use to analyse your loan application. The ratio is highly useful because it offers a good indication on whether you’ll be able to pay back the loan facility with interest.
A DSCR over 1 is good and the higher it is the better. So, if you are below 1, you should talk to your advisors before proceeding to apply for a loan facility.
Funding providers don’t want to lose their investment or deal with the hassle of defaults. So, they look for reassurances that your business has generated income and will continue to generate enough income to pay the loan facility back.
Having just enough cash to cover your loan payments generally isn’t enough. They are looking to see if you have sufficient cash “reserve” to pay off the loan.
Funding providers will have slightly different methods for working out DSCR. So, it is advisable to ask the funding provider at the start of the loan application process how they calculate DSCR. However, the most common formula for calculating debt service coverage ratio is as follows:
DSCR = business’s annual et operating income / business’s annual debt payments
When trying to figure out your own DSCR, the most common mistake is not accounting for existing business debt.
The DSCR formula has to include existing debt as well as the loan you are applying for – funding providers need to see all your business debt.
These are the types of debt that you should include in your calculation:
While every funding provider is different, most will look for a DSCR ratio of 1.15 or more. The state of the economy can be a driver in driving the ratio up and down.
DSCR <1: you have negative cash flow and don’t have enough income to service all your debt.
DSCR=1: you have exactly enough cash flow to cover your debt but don’t have any cash reserves.
DSCR>1: you have positive cash flow and have more income to pay off your debt.
As you can see your DSCR is a very important factor in deciding whether you will get approved for a loan facility. We highly recommend checking your DSCR before applying for a loan facility, so not to impact your business credit score off the back of a low DSCR.
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