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DSCR = net operating income ÷ total debt service. Lenders typically look for 1.25 or higher.
Step 1: start from operating profit
Begin with your operating profit — profit before interest and tax. This is the earnings your core trading produces, before the cost of financing. It is the base a lender builds the cash figure from.
Step 2: add back non-cash costs
Add back depreciation and amortisation — accounting charges that reduce profit but take no cash out. This gives a figure close to EBITDA, a common proxy for cash available before financing.
Step 3: strip out one-offs and tax
Remove anything that will not recur — a one-time gain, an exceptional cost — and set aside tax that must be paid. What remains is a fair estimate of the steady cash available for debt service. Lenders make these adjustments so the ratio reflects normal trading.
Step 4: divide by debt service
Total up the loan repayments — principal and interest — due over the same period, then divide your cash available by that figure. The result is your DSCR. Above 1.0 cash covers the debt; 1.25 to 1.5 is the comfortable range lenders like.
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Frequently asked questions
How do I calculate DSCR?
Take operating profit, add back non-cash costs like depreciation, strip out one-offs and tax to get cash available for debt service, then divide by your total loan repayments over the same period.
What is a good DSCR?
Above 1.0 means cash covers the debt; 1.25 to 1.5 is the comfortable range most lenders want, giving a buffer if trading dips. Below 1.0 signals the business cannot service the debt as it stands.
What counts as cash available for debt service?
Typically operating profit plus non-cash charges like depreciation and amortisation, minus one-offs and tax. It approximates the steady cash your trading generates before financing costs.
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