Debt Service Coverage Ratio (DSCR)

Measures a business's ability to service its debt, the ratio of operating income to total debt obligations.

DSCR is a critical metric for lenders when assessing loan applications. A DSCR above 1.0 means the business generates enough income to cover debt payments. Most lenders require a minimum DSCR of 1.25x, meaning the business earns 25% more than its debt obligations. A higher DSCR signals lower default risk and can lead to better lending terms.

Serviceability vs covenant DSCR

There are two different DSCR conversations and confusing them costs deals. Serviceability DSCR is what brokers calculate during the application, does forward EBITDA cover the proposed total debt service? Covenant DSCR is what the bank tracks every quarter after settlement, does actual EBITDA still cover actual debt service? Most lenders set covenants 0.10-0.20x below the serviceability threshold to give borrowers headroom.

What lenders actually require

Mainstream banks typically require 1.25-1.50x for trading businesses, 1.20-1.30x for commercial property, and 1.10-1.25x for owner-occupied premises. Equipment finance is generally lighter (1.10-1.20x). Specialist and asset-based lenders may go lower but will charge more in margin. The lower your DSCR, the more concentration, customer, and director-guarantee scrutiny you will face.

Why your "Xero DSCR" usually fails

Bank credit teams calculate DSCR on a normalised basis, adjusting for owner above-market wages, one-off expenses, related-party rent, and investment income. The number that comes off your accounting software almost never matches what the lender sees. Loan-pack applications fail at this stage all the time because the broker quoted Xero DSCR and the bank ran their own.

How Advisorli prepares you

The Loan Pack calculates a normalised DSCR using both EBITDA and adjusted operating cash flow, with all common addbacks itemised so brokers and credit teams can review them line by line. The covenant DSCR is also tracked forward across the 13-week and 12-month forecasts so you see covenant breaches three months before they happen.

Formula

Example

A business with $200K operating income and $150K annual debt payments has a DSCR of 1.33x.

Related Terms

Industries where Debt Service Coverage Ratio (DSCR) matters most

See this metric in action

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