Glossary

What is the debt service coverage ratio (DSCR)?

The debt service coverage ratio (DSCR) is a measure of a borrower's ability to cover its debt payments from operating income. It is calculated as net operating income divided by total debt service. A DSCR above 1.0 means income exceeds debt payments; below 1.0 means it does not. It is a core metric in commercial real estate and business lending.

How DSCR is calculated

DSCR = Net Operating Income / Total Debt Service. For example, if a property generates $120,000 in annual NOI and annual debt payments are $100,000, DSCR is 1.20 — the property produces 20% more income than needed to cover debt.

Lenders typically require a minimum DSCR (often 1.20–1.25 for commercial real estate) to provide a buffer against income fluctuations. The exact threshold varies by lender, product, and risk appetite.

DSCR in SMB and MCA lending

For small business lending and MCA, the concept translates to whether the business generates enough cash flow to support the proposed advance or repayment schedule. Bank statement analysis — reviewing deposits against proposed daily remittances — is a common proxy for a formal DSCR calculation.

FAQ

Debt Service Coverage Ratio (DSCR) — common questions

What is a good DSCR?

Lenders generally look for a DSCR of at least 1.20–1.25 in commercial real estate, meaning income covers debt by 20–25%. Requirements vary widely by lender and product type.

How is DSCR different from LTV?

LTV (loan-to-value) measures collateral coverage; DSCR measures cash flow coverage. They address different risks and are typically evaluated together in commercial underwriting.

Ability to repay Factor rate

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