Glossary
Debt service cover ratio (DSCR)
How many times a business's cash earnings cover its total debt repayments, principal and interest included. The first number a credit assessor looks for.
In plain English
The debt service cover ratio divides a business's cash earnings by everything it must pay its lenders in a year: principal and interest, across every facility. A DSCR of 1.0x means the business earns exactly enough to make its repayments, with nothing spare. Below 1.0x, the debt is being paid from somewhere other than trading, and that never lasts.
Lenders do not test DSCR at the interest rate you are offered. They test it at a higher assessment rate, on adjusted earnings they have rebuilt themselves. That is why a deal that looks comfortable on the vendor's numbers can fail inside the bank.
Why a lender cares
Most commercial credit teams want to see DSCR of at least 1.25x to 1.5x at their assessment rate, on their view of the earnings, not yours. It is usually the single covenant that decides whether a facility is approved, and it is the headline number in every serviceability model we build.
Worked example
A business with $280,000 of adjusted cash earnings and $200,000 of annual repayments has a DSCR of 1.4x. Retest the same repayments at an assessment rate two points higher and the ratio falls; whether it stays above the lender's line is exactly what the model shows.
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