Getting ready to apply for a commercial loan, but not sure if your financials will receive an approval from the bank? This is the first in a series of posts explaining financial equations and ratios so that you feel more prepared when you talk to the bank about your loan request. First up: Debt Service Coverage Ratio.

What Is the Debt Service Coverage Ratio?

DSCR measures a company's ability to cover its debt obligations, comparing its net profits to its debt repayments. In other words, it shows how much profit you have to pay your loans and credit balances back. Here's how you can calculate it:

The Formula
DSCR = Net Profit ÷ Total Debt Service

Why Is DSCR Important?

A DSCR greater than 1 means you have cash left over after paying your loans back to re-invest back into your business, further pay down your debts, or even pay yourself more! On the other hand, a DSCR below 1 is concerning and means that you are unable to pay your current loans back with how your business operates.

Example of Debt Service Coverage Ratio

ABC Company has net profits at the end of 2024 of $75,000 and $50,000 in annual debt repayments. Its DSCR would be:

$75,000 ÷ $50,000 = 1.50
This company is showing a positive DSCR and would have $25,000 to re-invest, pay off more debt, or pay to its owners.

Interested in learning more about the Debt Service Coverage Ratio or applying this ratio to your own financials? Please feel free to reach out — I would be happy to help!

Get in Touch
MM
Michael Montgomery
Owner & Consultant, Interval Consulting

Michael founded Interval Consulting after a career in business banking and accounting. He has helped 159+ small business owners across Minnesota secure financing, improve their financials, and build businesses worth lending to.