Debt Service Coverage Ratio (DSCR) is the primary metric commercial lenders use to evaluate whether a business or property generates enough cash flow to service its debt obligations.
DSCR = Net Operating Income (NOI) / Annual Debt Service
A DSCR of 1.25 means the business generates $1.25 of operating income for every $1.00 of annual debt payments — a 25% cushion.
What Counts as Debt Service?
Annual debt service = all principal repayments + all interest payments due in the year. Include every loan, line of credit, and equipment financing obligation.
What Counts as NOI?
NOI = Revenue − Operating Expenses. Operating expenses exclude: - Interest (it's what you're measuring coverage against) - Income taxes (non-operating) - Depreciation and amortization (non-cash)
For real estate: NOI = Gross Rental Income − Vacancy − Operating Expenses.
Minimum DSCR by Lender Type
| Lender | Typical Minimum DSCR |
|---|---|
| SBA 7(a) loan | 1.25 |
| Conventional commercial | 1.20–1.35 |
| USDA B&I loan | 1.25 |
| Commercial real estate | 1.20–1.30 |
| Hard money / bridge | 1.00–1.10 |
Improving DSCR
- Increase NOI by raising prices or reducing operating costs
- Extend loan term to reduce annual principal payments
- Refinance at a lower rate to reduce interest component
- Pay down debt to reduce the outstanding principal balance