Debt Service Coverage Ratio (DSCR)

DSCR is one of the core underwriting metrics for business loans, commercial real estate loans, and SBA financing. The formula: DSCR = Net Operating Income (NOI) / Annual Debt Service. A DSCR of 1.00 means the business generates exactly enough cash flow to cover its debt payments with no margin. A DSCR of 1.50 means the business generates 50% more cash flow than required for debt service — a comfortable cushion.

DSCR Calculator example: A business with $200,000 NOI servicing $150,000 in annual debt has a DSCR of 1.33 ($200K / $150K). Most commercial lenders require minimum DSCR of 1.20-1.25. SBA's regulatory floor is 1.10x (effective March 1, 2026, per Procedural Notice 5000-875701), though most SBA 7(a) lenders still underwrite to 1.15-1.25 in practice for repayment cushion. Lower DSCR thresholds are sometimes available with stronger collateral or personal guarantee.

DSCR is especially critical for real-estate-backed business financing and SBA 504 (which finances commercial real estate). Lenders run DSCR sensitivity scenarios (e.g., 'DSCR holds at 1.10 under a 15% revenue decline') to assess risk.

The Federal Reserve's Senior Loan Officer Opinion Survey (https://www.federalreserve.gov/data/sloos.htm) tracks commercial-bank DSCR and coverage-covenant standards quarterly. The SBA SOP 50 10 (https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs) specifies SBA lender requirements for DSCR analysis on 7(a) and 504 applications. The FDIC's Examination Policies Manual (https://www.fdic.gov/resources/supervision-and-examinations/examination-policies-manual/) defines examiner expectations for DSCR thresholds on commercial real estate loans.