1. What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to cover its debt obligations with its operating income. It's commonly used by lenders to assess the creditworthiness of borrowers.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• Net Operating Income — Company's operating income after operating expenses
• Total Debt Service — Total of all principal and interest payments due in a period

Explanation: A DSCR of 1 means the company has exactly enough income to pay its debt obligations. Higher than 1 indicates excess income, while lower than 1 indicates insufficient income.

3. Importance of DSCR Calculation

Details: Lenders typically require a minimum DSCR (often 1.2-1.5) to approve loans. It helps assess the risk of loan default and determines loan terms.

4. Using the Calculator

Tips: Enter both values in dollars. Net Operating Income should be annual, and Total Debt Service should represent annual debt payments.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR ratio?
A: Generally, 1.25 or higher is considered acceptable by most lenders, with 1.5+ being preferable.

Q2: How is DSCR different from debt-to-income ratio?
A: DSCR focuses on business cash flow relative to debt payments, while debt-to-income compares personal debt payments to personal income.

Q3: Can DSCR be less than 1?
A: Yes, but it indicates the company doesn't generate enough income to cover its debt obligations, which is a red flag for lenders.

Q4: How often should DSCR be calculated?
A: For loan applications, it's calculated annually. Businesses should monitor it quarterly or when significant financial changes occur.

Q5: Does DSCR include all expenses?
A: No, it uses operating income which excludes taxes, interest, and non-operating items. It focuses on core business profitability.