Debt service coverage ratio (DSCR): the guide for directors

2 min read

DSCRCash ÷ debt service

>1.0Cash covers repayments

1.25–1.5Comfortable range

Annual net operating income (£)

Annual loan repayments (£)

DSCR = net operating income ÷ total debt service. Lenders typically look for 1.25 or higher.

The formula

DSCR = cash available for debt service ÷ total debt repayments over the same period. "Cash available" usually starts from operating profit, adds back non-cash costs like depreciation, and strips out anything that would not recur. A DSCR of 1.0 means every pound of cash is spoken for; 1.5 means you generate half as much again as you need.

What level lenders want

Most commercial lenders look for a DSCR comfortably above 1.0 — often 1.25 or more — so there is a buffer if trading dips. A ratio below 1.0 tells a lender the business cannot service the proposed debt from its current cash, which usually means a smaller loan, a longer term, or a decline.

Why it beats profit as a test

Profit can be strong while cash is tight — money locked up in unpaid invoices or stock does not pay a loan. DSCR focuses on cash, which is what actually clears repayments. That is why it, not profit, sits at the heart of affordability.

Calculate yours

Enter your annual cash available for debt and your annual repayments below. If the result is under 1.25, consider a smaller amount or a longer term before applying.

Improving your ratio

You can raise DSCR two ways: increase the cash (collect faster, lift margin, cut waste) or reduce the repayments (borrow less, or spread over a longer term).

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Frequently asked questions

Is a higher DSCR always better?

For borrowing, yes — it shows more cushion. Extremely high cover might suggest you could borrow more to invest, but for loan approval, more cover is always safer.

What counts as cash available for debt service?

Typically operating cash flow: profit before interest and tax, plus non-cash items like depreciation, minus tax and any essential unavoidable outgoings. Lenders adjust for one-offs.

How does the loan term affect DSCR?

A longer term lowers the annual repayment, which raises DSCR and improves affordability — at the cost of more total interest. It is a common lever to make a loan fit.