DSCR Calculator

What is the debt service coverage ratio?

The debt service coverage ratio (DSCR) measures how many times a business's operating cash flow covers the principal and interest it must pay on its debt over the same period. A DSCR of 1.00x means cash flow exactly covers debt payments with nothing left over; anything below 1.00x means the business has to find the shortfall somewhere else — cash reserves, an owner injection, or new borrowing.

Lenders use DSCR twice: at underwriting, to decide whether to lend, and afterwards as a financial covenant you must keep meeting while the loan is outstanding. That second use is why the ratio matters month to month, not just on the day the loan closes. If you also want to know how far you are from your covenant floor, the covenant headroom checker turns the ratio into a dollar cushion.

The formula

DSCR = operating cash flow ÷ total debt service

• Operating cash flow is usually approximated by EBITDA (earnings before interest, taxes, depreciation and amortization). The SBA, for example, defines operating cash flow as EBITDA in its 7(a) underwriting rules, and divides it by debt service to get coverage.
• Total debt service is the scheduled principal plus interest on all business debt for the same period — every term loan, equipment note, and line-of-credit payment, not just the loan you are testing.
• Your loan agreement's definitions win. Many agreements adjust EBITDA (for example, subtracting unfinanced capital expenditures or distributions), so read the covenant definition before you compare your number to the floor.

Worked example

Illustrative example — a hypothetical distribution business with two loans, using trailing-twelve-month figures:

1. EBITDA: $910,000.
2. Term loan: $360,000 principal + $140,000 interest = $500,000 of debt service.
3. Equipment note: $150,000 of principal and interest.
4. Total debt service: $500,000 + $150,000 = $650,000.
5. DSCR = $910,000 ÷ $650,000 = 1.40x.

Had the owner tested only the term loan, the ratio would have looked like $910,000 ÷ $500,000 = 1.82x — a materially rosier picture than the 1.40x the lender will actually calculate.

How to read your result

Below 1.00x, the business is not generating enough operating cash to service its debt. Between 1.00x and your covenant floor, payments are covered but you are in breach of the loan terms. Above the floor, the distance to it is your margin for a bad quarter.

There is no single universal floor — it is whatever your loan agreement says. As one published reference point, the SBA requires an applicant's DSCR for 7(a) Small Loans to be equal to or greater than 1.10:1 on a historical or projected basis (SBA Procedural Notice 5000-876777). Conventional bank covenants are negotiated loan by loan, so check your own credit agreement rather than relying on a rule of thumb.

Trend matters as much as level. A ratio that has slid for three straight months is a stronger warning than a single dip caused by a one-off expense.

Common mistakes

• Leaving debts out of debt service. Equipment notes, vehicle loans, and seller notes all count. Omitting them inflates the ratio, as the example above shows.
• Mixing periods. Annual EBITDA divided by one quarter of debt service (or the reverse) produces a number that is off by a factor of four. Match the periods.
• Using net income instead of the covenant's cash-flow definition. Net income is after interest and non-cash depreciation, so it understates coverage. Conversely, some covenants deduct capex or distributions from EBITDA, which lowers it. Use the definition in your agreement.
• Testing once a quarter. Coverage can drift toward the floor for weeks before anyone recalculates it by hand. A breach discovered after quarter-end leaves no time to talk to the lender first.

Frequently asked questions

Further reading

• Finance integration after an acquisition: the first 100 days — An acquisition adds a second set of debts to cover — how to integrate the finance function without losing sight of them.
• The 90-day plan for a new CFO inheriting a mess — Inheriting a lender relationship you didn't build? Where coverage fits in the first 90 days.
• Your board deck is too long (and saying the wrong things) — Put coverage and covenant headroom on the one page the board actually reads.
• Covenant monitoring before the breach: building an early-warning system your lender trusts — The monitoring routine behind a DSCR covenant.

More free tools

• Cash Runway Calculator
• Loan Covenant Health Check
• DSO & AR Aging Calculator
• Gross Margin Analyzer
• 13-Week Cash Flow Starter
• Covenant Headroom Checker

Sources

• SBA Procedural Notice 5000-876777, revising SOP 50 10 8 (effective March 1, 2026; copy hosted by NAGGL)

Worked examples on this page are illustrative and use hypothetical figures, not customer data. This page is general information, not lending, tax or investment advice.