DSCR stands for Debt Service Coverage Ratio. It's the single most important financial metric in bank underwriting — and most business owners applying for loans have never heard of it.
The Simple Definition
DSCR measures whether your business generates enough cash flow to cover its debt payments. The formula:
DSCR = Net Operating Income ÷ Total Annual Debt Service
Banks typically require a DSCR of 1.25 or higher.
A DSCR of 1.25 means your business earns $1.25 for every $1.00 of debt payment. Anything below 1.0 means you're not generating enough to cover existing debt — a hard stop for most banks.
What Counts as Debt Service?
Every loan payment, lease obligation, MCA payment, and existing line of credit gets included. This is why your debt schedule matters — and why businesses with multiple MCAs or short-term loans often struggle with bank approval even when revenue is strong.
How to Improve Your DSCR
- Pay off or consolidate high-payment short-term debt before applying
- Refinance existing obligations to lower monthly payments
- Increase net operating income by reducing discretionary expenses
- Structure your loan request to fit within your actual debt capacity
Why This Matters for Your Application
Knowing your DSCR before you apply tells you exactly how much new debt you can service — and structures your loan request accordingly. We calculate this as part of our process before approaching any bank.
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