The Debt-Service Coverage Ratio (DSCR) measures a company’s or an individual’s ability to repay loans. It’s the ratio of your operating income to your total debt obligations, including the principal and interest.

Both your short-term and long-term debts are included in this calculation. In different formulations, you can define the numerator differently. Some may use net operating income as the numerator, while others use EDBT.

The DSCR is a tool that helps investors assess a company’s creditworthiness. It also helps determine the current net worth of the company.

How Is It Calculated?

The most commonly used debt-service coverage ratio formula has net operating income as the numerator and total debt as the denominator.

Method 1

Some estimations do not include the company’s or individual’s operating costs. The formula in this example is as follows:

DSCR = EBITDA ÷ Total Debt Service

Or

DSCR = Revenue ÷ Total Debt Service

Where,

• DSCR = Debt-Service Coverage Ratio
• EBITDA = Earnings before Interest, Tax, Depreciation, and Amortization
• Total Debt Service = Principal + Interest (short-term and long-term)

Method 2

By subtracting operational expenses from revenue, this method generates net operating income. The revenue used in this calculation does not include taxes, interest payments, amortization, or depreciation. EBITDA is the acronym for earnings before interest, taxes, depreciation, and amortization.

DSCR = Net Operating Income ÷ Total Debt Service

Where,

• DSCR = Debt-Service Coverage Ratio
• Net Operating Income = Revenue – Operating Expenditure
• Revenue = total earnings before the deduction of tax interest, depreciation, or amortization
• Total Debt Service = Principal + Interest (short-term and long-term)

What Is The Role Of DSCR In Lending?

The debt-service coverage ratio demonstrates an entity’s ability to service its current debts entirely based on its net revenue for personal, commercial, or government finance.

The DSCR figure illustrates how many times net income exceeds current debt obligations. For example, a DSCR of three shows that net operating income exceeds existing debt commitments by three times.

Lenders compute the DSCR using the borrower’s financial data before making a loan offer to determine whether the borrower will be able to repay the debt.

A debt-service coverage ratio of less than one implies negative net cash flow, indicating that the borrower’s current debt cannot be serviced entirely from net operating income. They’ll have to rely on other resources, such as a second loan or cost-cutting measures.

You can easily apply for a loan based on your DSCR. At Commercial Private Equity, we accept business loan applications with DSCR scores that most traditional lenders reject.

Contact us today for various hard money loans, including raw land, asset-based, and other types of commercial and industrial lending that is simple, quick, and cost-effective.