DSCR

What is DSCR?

DSCR measures how many times over your cash flow covers your loan payments. A DSCR of 1.0 means you earn exactly enough to make the payments with nothing to spare. A DSCR of 1.5 means you earn one and a half times what you owe each year.

Lenders calculate it from your tax returns or financial statements and include the new loan you are asking for, which is why a profitable business can still be declined: the new payment pushes the ratio under the floor. Our DSCR guide covers how lenders adjust your income before they divide.

How is DSCR calculated?

Divide net operating income by total annual debt service. Net operating income is usually your profit before interest, taxes, depreciation and amortization, sometimes with owner salary added back.

• Your business earns $150,000 in net operating income.
• You already pay $60,000 a year on an existing loan.
• You are applying for a loan with a $4,000 monthly payment, which is $48,000 a year.
• Total debt service is $108,000. DSCR is $150,000 divided by $108,000, which is 1.39.

At 1.39 most lenders would approve on cash flow. At a $7,500 monthly payment, debt service would be $150,000 and DSCR would be 1.0, a decline almost everywhere. Try your numbers in our DSCR calculator.

What do lenders consider normal?

Most banks and SBA lenders want a DSCR of 1.25 or higher. Commercial real estate lenders often want 1.20 to 1.35 depending on the property. Equipment lenders are sometimes comfortable at 1.15 because the equipment itself is collateral.

Online lenders typically do not quote a DSCR. They read bank deposits and daily balances instead, which is why they approve businesses banks decline, at a higher price. A DSCR under 1.0 means the loan would be paid from savings or new borrowing, a warning sign for you as much as the lender.

What should you watch for?

Watch how the lender defines income. Some use last year's tax return only, which hurts a business that grew this year. Some strip out one time gains or owner distributions. Ask what number they used, because a different add back can move DSCR from 1.1 to 1.3.

Also watch for a DSCR covenant. Many bank and commercial real estate loans require you to stay above a set DSCR every year, and dipping below it can put the loan in default even if you never missed a payment. Our guide on reading a term sheet covers covenants.

Related terms

DSCR is the core cash flow test in underwriting, weighed alongside collateral and working capital, and the loan's amortization sets the payment in the denominator. You will see it most on SBA loans and commercial real estate loans. You can apply here, or ask your AI assistant to calculate your DSCR and apply for you through our MCP server.