What Is DSCR, Really?
DSCR stands for Debt Service Coverage Ratio. It measures how easily your business can cover debt payments based on your income.
The formula:
DSCR = Net Operating Income / Total Debt Service
- Net Operating Income = profit before interest, taxes, depreciation, and amortization (EBITDA)
- Total Debt Service = loan principal + interest payments due in the same period
A DSCR of 1.25 means you generate $1.25 for every $1.00 in debt obligations.
For SBA loans and commercial bank loans, 1.25 is the gold standard.
Why DSCR Matters to Lenders
Lenders want to know:
- Can you cover the loan payments?
- Is there a buffer if things go wrong?
DSCR is their shorthand for both. It combines:
- Your actual or projected earnings
- Your loan terms
- Risk tolerance
The higher the DSCR, the safer the loan looks.
DSCR Benchmarks by Loan Type
Loan Type | Target DSCR |
SBA 7(a) Loans | 1.25 |
Commercial Term Loans | 1.25–1.35 |
Real Estate Loans | 1.2+ |
Working Capital | 1.15+ |
Lower than 1.0? That means you don’t generate enough income to cover payments. Expect a denial.
Where DSCR Fits in Your Business Plan
A smart business plan will show DSCR in two places:
- Financial Forecasts: Projections for the next 3 years, with DSCR calculated annually
- Loan Repayment Section: Include a simple table showing projected EBITDA, loan payments, and resulting DSCR
This makes underwriting easier and builds confidence.
How to Improve Your DSCR
- Increase income: Drive more sales or raise prices
- Cut costs: Improve gross margin or reduce overhead
- Refinance debt: Lower payments or interest
- Delay new expenses: Push out hires or capital purchases
DSCR is dynamic. You control many of the variables.
Sample DSCR Calculation
Let’s say:
- EBITDA (Year 2) = $250,000
- Total Loan Payments = $200,000
DSCR = 250,000 / 200,000 = 1.25 ✅ Strong
Now imagine:
- EBITDA = $150,000
- Debt Service = $200,000
DSCR = 0.75 ❌ Red flag
Red Flags to Avoid
- Not including DSCR at all
- Assuming DSCR improves without explanation
- Tying DSCR to aggressive sales growth with no plan
- Forgetting to adjust for interest rate changes or balloon payments
Tip: Most SBA loan denials happen because the DSCR doesn’t support the loan size.
Final Thought: Lenders Speak DSCR
You don’t need to be an accountant to understand DSCR—but you do need to be able to speak the language of repayment.
Include DSCR in your business plan, explain your assumptions, and tie it directly to your loan strategy.
See how we model DSCR into every bank-ready plan →
