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Guide · Borrowing

What is debt service coverage ratio (DSCR)?

It's the number a lender checks first: how many times your yearly earnings cover your yearly loan payments. Here's how to work it out, what ratio banks and the SBA look for, and a worked example you can copy with your own figures.

Checked November 10, 2026

The short answer

Debt service coverage ratio, or DSCR, divides the cash your business earns in a year by the loan payments it owes in that year, principal and interest together.

DSCR = Yearly earnings available for debt ÷ Yearly debt payments $150,000 ÷ $100,000 = 1.50x

A ratio of 1.50x means you earn $1.50 for every $1.00 of loan payments. At 1.00x, as SoFi puts it, the business's income is just enough to service its debt, with nothing left over. Below 1.00x, you can't make the payments from earnings alone.

What goes on each side

Earnings (the top number)

Most lenders start from EBITDA: earnings before interest, taxes, depreciation and amortization. You add interest back because it's part of the payments you're testing, and depreciation because it isn't cash going out. The SBA's rules for small 7(a) loans, as summarized by a law firm, measure operating cash flow as EBITDA, with allowed adjustments.

Lenders then adjust it for add-backs: one-time costs that won't happen again, such as a legal settlement or a move. Every add-back needs a document behind it. A lender may throw out ones it can't check.

Formulas differ. Some lenders use net operating income plus non-cash charges, and Bluevine notes that different lenders may use slightly different formulas. Ask yours which one it uses.

Debt payments (the bottom number)

A full year of required payments, principal and interest, on all business debt, including the new loan you're asking for. That means term loans, equipment and vehicle loans, and SBA loans. Some lenders also count equipment and property leases: SoFi's example adds lease payments for property and equipment to debt service.

What ratio do lenders want?

These are minimums. The SBA lender can ask for more, so plan on 1.25x unless your lender tells you otherwise.

A worked example

The business is made up: a $2.4 million distributor that wants a $600,000 loan. All the figures are examples, so swap in your own.

Step 1: earnings

Net income $180,000 + Interest $40,000 + Depreciation $60,000 EBITDA $280,000 + One-time legal settlement $20,000 Adjusted EBITDA $300,000

This example business is taxed as a pass-through, so there's no company income tax to add back. If yours pays tax, add it back too.

Step 2: coverage today

Existing loan payments $9,000 a month $108,000 a year DSCR = $300,000 ÷ $108,000 = 2.78x

Step 3: coverage with the new loan

The new loan is $600,000 over 10 years at an example 10% rate.

New loan payment $7,929 a month $95,149 a year All payments $203,149 a year DSCR = $300,000 ÷ $203,149 = 1.48x

1.48x clears a bank's 1.25x and the SBA's 1.15x. The loan payment calculator works out the payment for your own rate and term.

Step 4: the largest loan at 1.25x

Adjusted EBITDA ÷ 1.25 $240,000 a year − Existing payments −$108,000 a year Room for new payments $132,000 a year $11,000 a month At 10% over 10 years, that borrows about $832,383

The how much can I borrow calculator runs these steps with your numbers.

Step 5: test a bad year

Lenders ask what happens if earnings fall. Here's the example with earnings down 25%:

$300,000 × 75% = $225,000 DSCR = $225,000 ÷ $203,149 = 1.11x

That's below 1.25x and under the SBA's 1.15x. If your earnings swing from year to year, borrow less than the maximum, or make sure the business can ride out a slow stretch.

Global coverage: when your personal finances count

For a business with one or a few owners, lenders often look past the company. SoFi describes a global DSCR as based on the owner's personal income and personal debts. Lenders typically add your salary and other income, then subtract personal debt obligations and living expenses, and look at that alongside the business's numbers and any other companies you own. For standard SBA 7(a) loans, that global figure needs to be at least 1:1.

So the money you take out of the business matters. If you pay yourself a lot, the business shows less, and your personal side has to carry its own debts.

How to raise your DSCR

  1. Refinance short, expensive debt. In the example, say $3,500 a month of the existing payments is a loan with three years left at 11% (about $106,907 owed). Spread over 10 years at an example 10%, the payment falls to about $1,413 a month. That frees about $25,047 a year and lifts coverage with the new loan from 1.48x to 1.68x. Check any prepayment penalty first.
  2. Document your add-backs. One-time costs only count if you can prove them. Keep the invoices.
  3. Separate personal spending. Personal costs run through the business lower your earnings. Lenders may add some back, but clean books are easier to trust.
  4. Borrow less, or put more down. A smaller loan means a smaller payment.
  5. Fix the leaks before you apply. Every dollar of cost you cut adds a dollar to earnings. Our guide on finding wasted spending in QuickBooks® is a good start.
  6. Plan for the slow months. A yearly ratio can hide a tight quarter. The 13-week cash flow template shows whether the new payment still fits week by week.

This guide is general information, not financial or legal advice. Lender and SBA rules change, so confirm the requirement with your lender.

See your DSCR, from your books.

Tilo reads your QuickBooks or Xero books, works out earnings with add-backs, shows your coverage before and after a new loan and the largest loan at 1.25x, and builds the package a lender asks for. 7-day free trial, then $799 a month.

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Sources

All checked November 10, 2026. SBA's own SOP could not be opened for this check, so SBA rules are cited from law firm and consultant summaries. Confirm them with your lender.