# Debt Service Coverage Ratio (DSCR)

> The debt service coverage ratio (DSCR) measures a business's ability to cover its debt payments with its operating income. It is calculated by dividing net operating income by total debt obligations, including the loan being applied for.

## Key takeaways
- DSCR measures whether your operating income covers your debt payments, calculated as net operating income divided by total debt service including the new loan.
- A ratio above 1.0 means income exceeds debt payments, while below 1.0 means you'd come up short; many lenders want at least 1.25.
- You can improve your DSCR by raising net operating income, reducing existing debt, or choosing a longer term on the new loan.

## What DSCR measures

The **debt service coverage ratio (DSCR)** tells a lender whether your business
earns enough to comfortably make its loan payments. It compares the income your
operations produce against the total debt you have to repay — including the new
loan you're applying for.

A DSCR of **1.0** means income exactly equals debt payments, with no cushion. A
ratio **above 1.0** means you have income left over after debt; a ratio **below
1.0** means you'd come up short.

### How it's calculated

The basic formula is:

**DSCR = Net Operating Income ÷ Total Debt Service**

For example, if your business generates **$120,000** in net operating income and
owes **$100,000** a year in principal and interest, your DSCR is **1.2** — meaning
you earn 20% more than you need to cover the debt.

### What lenders look for

Many lenders want a DSCR of at least **1.25**, and some require more for larger
or riskier loans. SBA lenders commonly look for a similar minimum. A higher ratio
gives the lender confidence that you can absorb a slow month and still pay.

### How to improve your DSCR

- **Increase net operating income** by raising revenue or trimming operating
  expenses.
- **Reduce existing debt** or refinance high-cost balances before applying.
- **Choose a longer term** on the new loan, which lowers each payment and raises
  the ratio (though it can increase total interest).

### What to watch for

Lenders may calculate DSCR differently — some add back items like depreciation or
the owner's salary. Ask how a lender defines income and debt service so you can
estimate your own ratio accurately. Hoss Capital can help you match with lenders
whose DSCR requirements fit your numbers.

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