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DSCR = net operating income ÷ total debt service. Lenders typically look for 1.25 or higher.
What headroom actually is
Headroom is the slack between what you must repay and the cash your business reliably produces. At a cover ratio of 1.5, half of your cash again is spare after the repayment; at 1.05, almost none is. That spare cash is not waste — it is the margin that absorbs a late-paying customer or a quiet month.
Why the maximum is a trap
Borrowing right up to your affordability limit sets your cover at roughly 1.0, meaning every pound of cash is spoken for. One slow quarter and the repayment no longer fits — turning a good loan into an arrears problem that marks your credit file. The cheapest insurance is simply to borrow a little less.
How much buffer to leave
A practical target is to keep cover at 1.25 or better after the new loan, and to check it still holds if sales fell 15%. If it does not, reduce the amount or lengthen the term until it does. See how to stress test a loan.
Headroom and seasonality
Seasonal businesses need more headroom, because their cash arrives unevenly while repayments fall due every month. Size the loan against the quiet months, not the peak. A seasonal buffer is often the smarter structure.
Set your buffer, then borrow
Decide the cover you want to protect, work the loan back from there, and only then apply.
Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.
Frequently asked questions
How much headroom should a business loan leave?
Aim to keep your debt service cover ratio at 1.25 or higher after taking the loan, and confirm it still exceeds 1.0 if sales dropped 15%. That gap absorbs ordinary trading wobbles.
Is it worse to borrow too much or too little?
Borrowing too much is the more dangerous error, because it removes the buffer that protects repayments. If you borrow slightly too little, you can usually top up later once trading proves the extra is affordable.
Does a longer term give me more headroom?
Yes. Spreading the loan over a longer term lowers each repayment, widening the gap between outgoings and cash, and lifting your cover ratio — at the cost of more interest overall.
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