DSCR (Debt Service Coverage Ratio)
Short answer
DSCR (Debt Service Coverage Ratio) is your operating income divided by total annual debt payments. A DSCR of 1.25× or higher is the threshold most lenders use to call a business 'bankable' — below 1.0× means you're not earning enough to cover debt service.
Worth quotingThe median DSCR threshold for SBA 7(a) loan approval is 1.15× — but most banks privately underwrite to 1.25× to leave a safety margin.
Formula
DSCR = EBITDA / (Annual Principal + Interest Payments)
Take EBITDA (operating cash earnings) and divide by your total annual debt service — both principal and interest payments combined.
Why it matters
DSCR is the single most important metric in commercial and SBA lending. A DSCR of 1.0× means your earnings exactly cover your debt — no margin for error. Most SBA lenders require ≥ 1.25×. Construction sureties often require ≥ 1.5×. Below 1.0× and you're net-cash-negative on debt.
Benchmarks
Worked example
- EBITDA$300,000
- Annual debt service$200,000
300,000 / 200,000 = 1.50× DSCR — strong
People also ask
Common questions about DSCR (Debt Service Coverage Ratio)
What is DSCR?+
DSCR (Debt Service Coverage Ratio) measures how much operating cash flow a business generates relative to its annual debt payments. Calculate it as: EBITDA ÷ (Principal + Interest). A DSCR above 1.0 means the business earns enough to cover debt service.
What is a good DSCR?+
Most commercial lenders require a minimum DSCR of 1.25×. The SBA accepts 1.15× for 7(a) loans. Construction sureties typically want 1.5× or higher. A DSCR below 1.0 means the business is not covering its debt obligations from operations.
How do I calculate DSCR?+
DSCR = EBITDA ÷ (Annual Principal + Annual Interest). For a stricter version, use operating cash flow in the numerator and add lease payments to the denominator. CFO Grade computes both versions automatically from your P&L.
Is a 1.5 DSCR good?+
Yes. A DSCR of 1.5× means you generate $1.50 of operating income for every $1.00 of debt service — comfortably above the 1.25× threshold most banks require. Construction sureties and SBA underwriters often use 1.5× as a 'strong' benchmark.
How can I improve my DSCR fast?+
Three levers, fastest to slowest: (1) refinance to extend amortization (lowers the annual debt payment, instantly lifts DSCR), (2) raise gross margin via pricing or COGS cuts, (3) pay down high-interest balances. Avoid taking on additional debt — that compounds the problem.
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