1. What is Debt Service Coverage Ratio?

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 a borrower's creditworthiness.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• Net Operating Income — Company's revenue minus operating expenses (excluding taxes and interest)
• Total Debt Service — All principal and interest payments due in a period

Explanation: A DSCR of 1 means the company's operating income exactly covers its debt payments. Higher than 1 indicates the company can comfortably cover its debt, while lower than 1 suggests potential difficulties.

3. Importance of DSCR

Details: Lenders typically require a minimum DSCR of 1.2-1.4 for loan approval. A higher ratio indicates better financial health and lower risk for lenders.

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 ideal.

Q2: Can DSCR be less than 1?
A: Yes, but it indicates the company doesn't generate enough income to cover its debt obligations.

Q3: How is DSCR different from debt-to-income ratio?
A: DSCR focuses on business cash flow relative to debt, while debt-to-income compares personal debt payments to personal income.

Q4: What industries typically have higher DSCR requirements?
A: Volatile industries like restaurants or retail often require higher DSCRs (1.5+) due to higher risk.

Q5: Can DSCR be used for personal loans?
A: Typically no - it's primarily used for business/commercial loans. Personal loans use debt-to-income ratios.