DSCR is a financial metric that lenders use to assess a borrower's ability to repay their debt obligations . It measures a company’s available cash flow to pay current debt obligations . A higher DSCR generally indicates that a company is more capable of handling its debt payments.
Debt service coverage ratio (DSCR) measures cash flow against scheduled debt payments. Lenders calculate it as cash flow available for debt service divided by principal plus interest for the same period. Many banks start from net operating income or EBITDA and then adjust. The SBA calls the numerator operating cash flow and the denominator all future business debt service, including the proposed loan.
A ratio of 1.0 means cash flow exactly covers debt service. There is no cushion. A ratio below 1.0 means the company cannot pay its lenders from operations alone. A ratio of 1.25 means $1.25 of cash flow for every $1.00 of debt service.
Lenders use DSCR to size a loan, set covenants, and decide whether a buyer can finance an acquisition. They often compute two versions. Senior DSCR tests coverage of bank or first-lien debt only. Total DSCR tests coverage of all debt service, including mezzanine, seller notes, and other junior claims.
The inputs matter as much as the formula. Lenders add back or strip items that do not repeat. They may stress the interest rate. They may include a seller note that is on standby, or exclude it. Ask which cash-flow definition and which debt schedule they are using before you compare your number to theirs.