- 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.
Frequently asked
How do you calculate DSCR? +
Divide net operating income by total debt service (principal plus interest payments) for the same period. For example, $120,000 in net operating income against $100,000 in annual debt payments gives a DSCR of 1.2.
What DSCR do lenders want? +
Many lenders look for a DSCR of at least 1.25, meaning income is 25% higher than debt payments. SBA loans often use a similar minimum. Requirements vary by lender and loan type.
What does a DSCR below 1.0 mean? +
A ratio under 1.0 means the business doesn't generate enough income to cover its debt payments, which signals higher risk and usually makes approval harder.
Last updated: June 2026