DSCR check.
Can the business comfortably repay its term loans? Debt service coverage for one year.
The formula
DSCR = (profit after tax + depreciation + term-loan interest) ÷ (term-loan interest + principal repaid in the year). It shows how many times the cash from the business covers its term-loan payments.
How lenders read it
- Many lenders look for an average DSCR of about 1.25 or more over the loan; the exact bar depends on the lender and the industry.
- Below 1 means the business is not earning enough in that year to cover its loan payments.
- Lenders also add back other non-cash items and look at several years, not just one.
Questions.
What is a good DSCR?
Higher is safer. Many lenders are comfortable around 1.25 to 1.5 on average, but each lender sets its own bar.
Does a better DSCR get a lower rate?
It can help. A strong DSCR, with a good rating and collateral, gives you a stronger case to ask for better pricing.
Why add back depreciation?
Depreciation reduces profit but is not a cash payment, so it is added back to measure the cash available to repay loans.
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