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Debt-Service Coverage Ratio Calculator for Small Businesses

by Mike Abelson   December 20, 2016
Estimate the likelihood that you'll be approved for a loan by using our business capital eligibility estimator.
Financial Preparation

We asked our providers what they look at when approving a funding request, and many use the Debt-Service Coverage Ratio (DSCR) to make this important decision. We want you to be able to see your DSCR before you requested a loan, so we built a small business loan calculator that does just that.

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Our tool should help you get an idea of whether you'll be considered for funding. To get the most out of our new tool, take a look at these frequently asked questions about DSCR.

What is the Debt-Service Coverage Ratio?

The debt-service coverage ratio can pertain to corporate, government, and personal finance. When referring to corporate finance, the ratio is often used to estimate a business's accessible cash. It reveals to prospective and current investors whether a corporation has adequate revenue to take on new debt.

What is the Debt-Service Coverage Ratio Formula?

Calculator used for small business.

The formula for DSCR is Net Operating Income divided by Total Debt-Service. The equation compares the company's net operating income with its total debt. The net operating income is defined as the business's revenue minus its operating expenses. It can also be described as its earnings before interest and tax. Taxes and interest payments are not included.

Can You Show Me an Example of DSCR?

Imagine a company with an annual verifiable income of $400,000. It wants to take out a $60,000 loan with 5% interest and a loan term of 4 years. It already has a monthly credit obligation of $10,000.

The company’s estimated monthly business income would be $33,333, and its estimated monthly debt service would be $11,500. The company’s DSCR would be 2.90, showing that the business would likely be stable with the added credit costs.

What Does Debt-Service Coverage Ratio Indicate?

Man and woman calculating business debt on their computer.

Banks and lenders evaluate a borrower's debt-service-coverage ratio in order to help determine company stability and risk of default. When an individual's debt-service coverage ratio falls below one, this indicates a negative cash flow. It can be assumed that the applicant will not be able to meet ongoing debt responsibilities without the help of external funds.

For instance, a debt-service coverage ratio of 0.90 translates to a net operating income sufficient only to cover 90% of the annual debt obligations. When referring to a small business, a ratio such as 0.90 means that the company must depend in part on its reserves to meet its debt requirements. Many lenders deny loan applications from these types of applicants. However, others may fund on the condition that the borrower presents reliable funds and resources aside from their income.

On the other hand, if the debt-service coverage ratio is above one but still close to it, then the company is still unstable, and any disturbance may cause a decrease in cash flow, leaving them unable to meet their debts. In such cases, a lender may require that the borrower keep a certain level of debt-service coverage ratio throughout the life of the loan.

The least amount of debt-service coverage ratio that a lender will accept depends on circumstance. If the economy is flourishing, then loans and lines of credit are more accessible to borrowers.

What are Common Uses of the Debt-Service Coverage Ratio?

There are several main uses of the ratio:

  • measure the cash flow accessible to cover current debts
  • calculate the ability to repay ongoing debt, including principal and interest
  • determine the potential success of a buyout

Small business owners will sometimes use a debt-service ratio calculator to check what the lender sees before applying for a loan.

What Numbers are Used to Figure Out My DSCR?

 

Our debt-service coverage calculator asks for your verifiable annual income and your monthly credit obligations. Your verifiable annual income represents what your business earns during one calendar year. Your monthly credit obligations are what you currently pay each month to your creditors.

How Complicated is It?

The math a lender will use to determine if you qualify for a loan is actually pretty simple. Many providers only need a few numbers to get started.

Could You Tell Me More About the Equation?

The equation compares the money you make to the debt you owe. It's used to determine your loan eligibility. You can figure out your Debt-Service Coverage Ratio (DSCR) right now using our small business loan calculator. Our tool will also show you your estimated monthly debt payment, so you can get an idea of how much you'll owe each month.

Of course, a provider will look at more than just your DSCR. Your credit rating, business stability, financial history, and other factors will be taken into account before a provider offers you a loan or sets your interest rate.

What DSCR Should I Hope to Get?

Typically, you will need at least a 1.20 DSCR to be prequalified for a small business loan.

Why is My DSCR Important?

Man looking at account numbers for his business.

Providers don't like their loans to default. Either they get their money back through collections (which is expensive), or they never see that money again.

Too many defaults can put a lender out of business.

So, a lender will use your DSCR to help figure out how much of a risk it is to lend to you. If the number is higher, they figure there's a better chance you will pay back the funding.

Does Your Calculator Provide Any Other Information?

Yes. After you hit the "Calculate" button, you'll be shown your estimated monthly debt-service, which is the amount of money you'd pay each month when you combine your new loan amount with everything else you owe your creditors.

Can You Break DSCR Down to Simpler Terms?

Our business calculator will show you your monthly business income along with an estimation of what you'll be paying your creditors each month. The amount of money coming in needs to be higher than the amount going out. How much higher? That's where the DSCR comes in. The ratio needs to be at least 1.20.

Is the DSCR a Good Way to Gauge One's Ability to Pay Back a Loan?

While there are other factors that need to be looked at, comparing money coming into the money going out is a quick way to get an idea of whether you'll be able to pay back a loan. The number is helpful not just to your provider, but it can also help you assess whether it's smart to take out funding. Remember, just because you're approved for a loan doesn't mean you can afford it.

What Other Factors Does a Provider Use to Determine My Eligibility?

To be approved for a loan with one of our providers, you'll need to be a U.S. citizen, at least 18 years of age, have an address, and meet other requirements. Many of our providers will only work with businesses that have been around for longer than three months. It should be noted that while alternative small business funding can be easier to qualify for than traditional bank loans, there is no guarantee that you will be approved for funding by any of our lenders.

What Should I Do When I'm Ready to Request My Funding?

Man working out a business debt calculation.

After you're all done with our calculator, you can click the "Funding Request" button to start your search for working capital. Our system is built to help you get in contact with a respected provider from our network.

Our number one goal is to see you get funded. We'll try to set you up with a funding provider that can make that happen.

We hope you like our brand new small business funding calculator. It's easy to use. But don't let its simplicity fool you.

The calculator helps you guess if you'll be approved for funding or not – even before you reach out to a funding source. This knowledge can help you properly set your loan expectations, so you can create a realistic loan plan. If you have any questions about our DSCR calculator or anything else on our site, please feel free to reach out.

How Can You Increase Your Debt-Service Coverage Ratio?

A business or individual can improve their ratio by increasing net operating income. That might be possible by following these steps:

  • Decrease expenses. Pay attention to where the money goes.
  • Increase in efficiency. Keep a close eye on everyday routines, and be diligent in locating redundancies and discrepancies.
  • Pay off current debts. One of the easiest ways to boost your creditworthiness is by covering current loans that are weighing down your budget.

The debt-service coverage ratio is a useful equation to determine creditworthiness, especially in terms of underwriting commercial real estate and business loans. It can also be beneficial when evaluating a tenant's financials and when securing funds for owner inhabited real estate. While the debt-service coverage ratio is a straightforward equation, it is sometimes misinterpreted, so it is important to understand the equation before using it.

Is DSCR the Same as the Interest Coverage Ratio?

Some lenders will look at a company’s interest coverage ratio (ICR) when making a loan decision. ICR is not the same as DSCR. It is the amount of interest the company needs to pay on its debt compared to its equity. To calculate ICR, divide EBIT (earnings before interest and taxes) by the interest payments due for a certain period.

While this calculation is different from DSCR, it serves the same purpose. Lenders use ICR to determine a company’s stability. A higher ICR indicates a better financial outlook.

Mike Abelson   Editorial Director
Digital Marketing
Mike is the Editorial Director at Lendza. He enjoys helping entrepreneurs and startups succeed through smart, innovative strategies. He’s partnered with CEOs and executives to grow businesses from the ground up. Before his work at Lendza, Mike was a stock market analyst. When he’s not traveling for work, he enjoys reading adventure and science fiction novels.