Debt Service Coverage Ratio (DSCR)
Definition
A lender's measure of whether your business earns enough to cover its loan payments. Below 1.0 means profits do not cover the debt.
Want a deeper explanation?
Formula
DSCR = Cash Available for Debt Service (often EBITDA) ÷ Annual Principal + Interest PaymentsMany banks look for a DSCR of 1.25 or higher, and SBA lenders typically want at least 1.15. It is often written into loan covenants, so falling below it can trigger a default even when payments are current.
Accurate monthly books are what let you see this coming. Watch for: a seasonal dip that pushes DSCR under the covenant at a quarter-end test date.
Example
EBITDA of $300,000 and $200,000 of annual loan payments gives a DSCR of 1.5.