What is debt service coverage ratio?
What Is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) is one of the most important numbers lenders look at when evaluating a business loan — especially for acquisitions, expansions, or ownership transitions. It measures whether your business generates enough cash flow to comfortably cover its debt payments.
How DSCR Is Calculated
DSCR = Annual EBITDA ÷ Annual Debt Service
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It shows the operating cash flow available after regular business expenses.
Annual Debt Service is the total amount of principal and interest payments due on all loans in a given year.
A DSCR of 1.5, for example, means the business generates $1.50 in cash flow for every $1.00 of debt payments.
Why Lenders Care About DSCR
Lenders want confidence that the business can handle its debt without straining cash flow. For acquisition loans, they typically look at:
Historical DSCR (based on past performance of the buyer, seller, or combined business)
Projected DSCR (based on pro forma financials after the acquisition)
Typical Lender Requirements
Conventional loans usually require a minimum DSCR of 1.5 to 1.75.
SBA loans have a baseline minimum of 1.15, but most SBA lenders set their own higher standards, often between 1.25 and 1.75.
Some lenders are more flexible than others, and the exact way they calculate EBITDA and debt service can vary. This is one reason why the same business may qualify with one lender but not another.
Practical Takeaways for Business Owners
Strong, consistent cash flow is the best way to improve your DSCR.
When buying a business, the combined cash flow of both companies is what matters most to lenders.
If cash flow is tight, even small improvements in profitability or expense management can make a big difference in qualifying for financing.
Understanding DSCR early helps you set realistic expectations about how large an acquisition or expansion your business can support.
At AdvisorBox, we help business owners understand key financing metrics like DSCR so they can prepare stronger applications and make more informed decisions about growth and acquisitions.