Debt Service Coverage Ratio (DSCR) measures a business's ability to cover its debt payments from operating cash flow — calculated as net operating income divided by total annual debt service. Lenders typically require DSCR of 1.20 or higher.
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 7(a) loans typically require 1.15-1.20. 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/releases/sloos/) 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.
1.25 or higher is considered comfortable by most commercial lenders. Below 1.20, approval gets harder and rates typically rise. SBA loans often accept down to 1.15-1.20 with strong collateral. Real estate lenders sometimes accept 1.10 with personal guarantee.
Two paths: increase NOI (raise revenue, cut costs) or decrease debt service (refinance existing debt at lower rate or longer term, pay down principal on existing debt). Refinancing high-rate debt into lower-rate term loans is often the fastest DSCR improvement.