The formula
DSCR = cash flow available for debt service ÷ debt service
- Debt service is everything due to lenders in the period: interest plus scheduled principal repayments.
- Cash flow available depends on the type of loan. For a business, lenders often start from EBITDA and deduct cash taxes, maintenance capex and any increase in working capital. That is CFADS, cash flow available for debt service. For a property it is the net operating income (NOI).
A DSCR of 1.00x means every dollar of cash goes to the lender, with nothing left for the owner and no room for a bad year. Below 1.00x, the loan cannot be paid from operations at all.
Example 1: a business loan
The business earns EBITDA of $2,400,000. EBITDA is not cash available to the bank: taxes ($300,000) have to be paid, machines have to be maintained ($350,000), and a growing business ties up cash in working capital ($150,000). What is left, CFADS, is $1,600,000. The year's debt service is $420,000 of interest plus $830,000 of principal, $1,250,000 in total.
DSCR = $1,600,000 ÷ $1,250,000 = 1.28x. If the loan agreement requires at least 1.20x, the covenant is met, but only just. The cushion formula =1-B11*B9/B6 shows that CFADS could fall by only 6.25% before the covenant is breached.
Some analysts use plain EBITDA ÷ debt service, which here gives 1.92x. It is quicker but flatters the borrower, because it assumes no tax, no capex and no working capital needs. Always check which definition a loan agreement uses.
Worked example: DSCR for a business and a property
Two separate calculations on one sheet. The second block also sizes the largest loan the property income supports.
| A | B | Formula in B | |
|---|---|---|---|
| 1 | Business loan | Annual $ | |
| 2 | EBITDA | 2,400,000 | |
| 3 | − Cash taxes paid | 300,000 | |
| 4 | − Maintenance capex | 350,000 | |
| 5 | − Increase in working capital | 150,000 | |
| 6 | Cash flow available for debt service (CFADS) | 1,600,000 | =B2-B3-B4-B5 |
| 7 | Interest | 420,000 | |
| 8 | Scheduled principal | 830,000 | |
| 9 | Debt service | 1,250,000 | =B7+B8 |
| 10 | DSCR | 1.28x | =B6/B9 |
| 11 | Minimum DSCR in the loan agreement | 1.20x | |
| 12 | Cushion: CFADS could fall by | 6.25% | =1-B11*B9/B6 |
| 13 | |||
| 14 | Rental property loan | Annual $ | |
| 15 | Net operating income (NOI) | 180,000 | |
| 16 | Annual mortgage payments | 144,000 | |
| 17 | DSCR | 1.25x | =B15/B16 |
| 18 | Lender's minimum DSCR for a new loan | 1.30x | |
| 19 | Maximum annual debt service | 138,462 | =B15/B18 |
| 20 | Interest rate (30 years, monthly payments) | 6.50% | |
| 21 | Maximum loan the NOI supports | 1,825,509 | =PV(B20/12,360,-B19/12) |
Example 2: a rental property
For property loans, the cash flow is the NOI: rent and other income minus operating expenses, before any mortgage payments. A building with NOI of $180,000 and annual mortgage payments of $144,000 has a DSCR of $180,000 ÷ $144,000 = 1.25x. Income could fall by a fifth before it no longer covers the mortgage.
Using DSCR to size a loan
Lenders turn the ratio around to decide how much they will lend. If the lender requires 1.30x on new loans, the maximum debt service the building can carry is NOI ÷ 1.30 = $138,462 a year. The loan that this payment repays over 30 years at 6.5% is its present value: =PV(B20/12,360,-B19/12) = $1,825,509. Lenders also cap the loan-to-value ratio, and the smaller of the two limits wins. When interest rates rise, the same NOI supports a much smaller loan, so buyers have to bring more equity.
What to do when the DSCR is too low
There are only two levers: more cash flow or less debt service. On the cash-flow side, that means higher prices or rents, lower operating costs, or less cash tied up in working capital. On the debt side, a longer repayment period spreads the principal over more years, a lower rate cuts the interest, and a smaller loan, with more equity, reduces both. Lenders look at the trend as well as one year: a DSCR that is falling quarter after quarter worries them more than one that is low but stable.
What DSCR do lenders want?
Requirements vary by lender, loan type, industry and economic conditions. Minimums of roughly 1.20x to 1.35x are common for commercial property and business loans, with higher requirements for riskier borrowers. Treat these as orientation and use the exact definition and threshold in the term sheet or loan agreement, because lenders differ in what they count as cash flow and debt service.
Common mistakes
- Counting only interest as debt service. That is the interest coverage ratio. DSCR includes scheduled principal.
- Using EBITDA as if it were cash. Taxes, maintenance capex and working capital all come first.
- Deducting the mortgage from NOI before calculating a property DSCR. Then you count the debt service twice.
- Mixing periods, such as monthly payments against annual NOI. Put both on the same basis, usually annual.
- Ignoring balloon payments. A large repayment at maturity is usually refinanced rather than paid from cash flow, so lenders treat it separately. Know which payments your ratio includes.
Frequently asked questions
What is a good debt service coverage ratio?
Lenders commonly ask for around 1.20x to 1.35x or more, depending on the loan type and risk. Above that, the borrower has a cushion if cash flow drops. Below 1.00x, the debt cannot be paid from operations.
What is the difference between DSCR and the interest coverage ratio?
Interest coverage divides operating profit or EBITDA by interest only. DSCR divides cash flow by interest plus principal, so it is the stricter test of whether a loan can actually be repaid.
How do I calculate DSCR in Excel?
Put the cash flow available for debt service in one cell and the interest and principal in others, then divide: =B6/(B7+B8). Format the result with two decimals or as a multiple such as 1.28x.
Does DSCR use NOI or EBITDA?
NOI for income-producing property, EBITDA-based cash flow (often CFADS) for operating businesses. The loan agreement defines the exact version a lender uses.