Debt service is the total cash required to cover all scheduled loan payments — principal plus interest — over a given period, typically one year. Lenders use the [[dscr|Debt Service Coverage Ratio (DSCR)]] to evaluate whether a borrower's income can comfortably support their debt service obligations.
Annual debt service = the sum of all principal repayments and interest payments due across all outstanding loans in a calendar year. It is the denominator in the DSCR formula: Net Operating Income ÷ Annual Debt Service. A DSCR of 1.25x means cash flow covers debt service 1.25 times — a common minimum threshold for commercial lenders (per the Federal Reserve's commercial lending guidelines and the SBA's standard for 7(a) loans). For a small business, understanding total debt service is critical when evaluating new borrowing. Adding a new loan increases debt service; if net cash flow doesn't grow proportionally, DSCR falls. Business term loans, SBA loans, equipment financing, merchant cash advance holdback amounts, and credit card minimums all contribute to total debt service. Personal-use analog: total household debt service (mortgage + auto + student loans + minimum card payments) as a share of gross income is the debt-to-income (DTI) ratio used in mortgage underwriting — the same logic applied to individuals.
Most conventional business lenders require a DSCR of at least 1.20x–1.25x. SBA 7(a) guidelines require a minimum of 1.15x for most loan types. Real estate lenders typically want 1.25x on the property's NOI relative to the mortgage debt service.
Increase net operating income (grow revenue, cut expenses) or reduce existing debt service (pay down or refinance existing obligations). Adding collateral does not improve DSCR — lenders look at cash flow separately.