Debt Service Coverage Calculator Formula
Understand the math behind the debt service coverage calculator. Each variable explained with a worked example.
Formulas Used
Debt Service Coverage Ratio
dscr = annual_debt_service > 0 ? net_operating_income / annual_debt_service : 0Annual Surplus After Debt Service
surplus = net_operating_income - annual_debt_serviceVariables
| Variable | Description | Default |
|---|---|---|
net_operating_income | Net Operating Income(USD) | 300000 |
annual_debt_service | Annual Debt Service (Principal + Interest)(USD) | 200000 |
How It Works
How to Calculate Debt Service Coverage Ratio
Formula
DSCR = Net Operating Income / Annual Debt Service
DSCR measures whether a business earns enough operating income to comfortably cover its debt obligations (both principal and interest). A DSCR of 1.0 means income exactly equals debt payments -- no margin for error. Lenders typically require a minimum of 1.25 to provide a safety cushion for unexpected revenue dips.
Worked Example
A company has $300,000 in net operating income and $200,000 in annual debt payments.
- 01DSCR = $300,000 / $200,000 = 1.50
- 02Surplus = $300,000 - $200,000 = $100,000
- 03The business earns $1.50 for every $1 of debt it must pay.
Frequently Asked Questions
What DSCR do lenders typically require?
Most commercial lenders require a DSCR of at least 1.20-1.25. SBA loans may require 1.15. Real estate lenders often require 1.25-1.35. A higher DSCR may qualify you for better loan terms.
What happens if DSCR falls below 1.0?
A DSCR below 1.0 means the business does not generate enough operating income to cover its debt payments. This typically triggers loan covenant violations and may require the business to inject additional cash or restructure debt.
Learn More
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Ready to run the numbers?
Open Debt Service Coverage Calculator