What Is DSCR? Debt Service Coverage Ratio Formula

Mohammed Aamir ShaikhFounder, Aamir Capital

Updated 5 October 20263 min read

The short answerThe debt service coverage ratio (DSCR) shows whether a business or project earns enough cash to pay its loan instalments. It is the cash available for debt service divided by the principal and interest due.

How it works

A DSCR of 1.0x means there is exactly enough cash to pay the lender. Lenders want a cushion, so they set a minimum DSCR in the loan agreement, often somewhere between about 1.2x and 1.5x depending on the sector and how certain the income is.

DSCR is used both to test whether existing debt is affordable and to size new debt. You work backwards from the minimum DSCR to find the largest loan the cash flow can support.

DSCR = Cash flow available for debt service ÷ (Principal + Interest)

A simple example

A property earns 1,600,000 a year after costs. Its loan payments are 1,280,000 a year. DSCR = 1,600,000 ÷ 1,280,000 = 1.25x.

How it is used

Testing whether a loan is affordable.
Sizing debt for a project or a property.
Monitoring loan covenants.

Common mistakes

Using profit instead of cash flow available for debt service.
Ignoring seasonal or uneven cash flow.
Forgetting that interest rates may rise.
Using an average DSCR when the lowest year matters most.

Questions

What is a good DSCR?

Higher is safer. Lenders often ask for at least 1.2x to 1.5x. Stable, contracted income needs a smaller cushion than uncertain income.

What is the difference between DSCR and interest cover?

Interest cover only looks at interest. DSCR looks at interest and principal repayments together.

Keep learning

For education only. This page is general information. It is not financial, investment, legal or tax advice, and it does not take your situation into account.

What is DSCR (debt service coverage ratio)?