Definition
DSCR (Debt Service Coverage Ratio) is a financial metric used in commercial lending to measure a borrower's ability to repay debt. It is calculated by dividing net operating income (NOI) by total annual debt service (principal + interest). A DSCR above 1.25x is typically required by lenders, meaning the borrower generates 25% more income than needed to cover debt payments.
Frequently asked questions
- What is DSCR?
- DSCR stands for Debt Service Coverage Ratio. It measures a borrower's net operating income relative to their total debt obligations. A DSCR of 1.25x means a business generates $1.25 for every $1.00 of debt payment — a common minimum threshold in commercial lending.
- What is a good DSCR for a commercial loan?
- Most commercial lenders require a minimum DSCR of 1.20x to 1.25x. A DSCR below 1.0x means the borrower cannot cover debt payments from operating income. Higher DSCR (1.5x+) indicates stronger credit quality and typically qualifies for better loan terms.
- How do you calculate DSCR?
- DSCR = Net Operating Income (NOI) ÷ Annual Debt Service. For example: if a business has $250,000 in NOI and $200,000 in annual debt payments (principal + interest), the DSCR is 1.25x. Lenders typically calculate this across multiple periods to assess trend.
- What is the difference between DSCR and FCCR?
- DSCR (Debt Service Coverage Ratio) measures operating income against debt payments. FCCR (Fixed Charge Coverage Ratio) is broader — it includes all fixed charges such as rent, lease payments, and insurance in addition to debt service. FCCR is a more conservative measure of ability to pay.
- Can AI calculate DSCR automatically?
- Yes. AI credit analysis platforms like Crediflow automatically extract income and expense data from financial statements, calculate DSCR across multiple periods, flag covenant breaches, and include the analysis in the credit memo — without manual data entry.
- What DSCR do SBA lenders require?
- SBA 7(a) and 504 loans typically require a minimum global DSCR of 1.15x to 1.25x, calculated across all business and personal debt obligations of the borrower and guarantors. Individual lender overlays may require higher thresholds.