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Debt service cover ratio

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The debt service cover ratio, or DSCR, is a measure of how easily a business or project can make its debt repayments. It is the ratio of the cashflow available for debt service (or “CFADS”) to the amount of debt service (principal repayments plus interest). A higher number is obviously better, both for you and the bank. It may be used to measure ongoing performance, or it might be used to determine the maximum amount of debt that a lender will advance.

Cash not profit

A DSCR is always measured using cashflow rather than P&L numbers, and therefore can take into account working capital movements, capital expenditure and tax payments, rather than revenue, operating costs and depreciation. Why? – Because you can only pay your debts with cash, not profits.


At it’s simplest, CFADS is calculated as

Receipts from customers
-Payments to suppliers and employees
-Taxes + Tax refunds
-Capital expenditure

Debt service is simply

Interest + Principal repayments


There are a number of variations that can be made to the simple calculation, dependent on the lender and the business.

Interest earned

Funds you have on deposit will usually earn interest. This interest can be added to CFADS or deducted from the interest expense in debt service.

Lease payments

Where lease payments are incorporated will usually depend on the type of lease. Operating leases, such as property rent would usually be included as a deduction within CFADS. The treatment of finance leases varies, and can be incorporated either as a deduction within CFADS or an addition to debt service.


The inclusion of money from insurance claims may depend on what type of insurance it is. Things like workers compensation and motor vehicles would usually be included as a cash receipt within CFADS, with the funds then being used to pay an associated operating cost (such as paying employers). Major property claims may have their own treatment, with banks commonly insisting that these funds are put into a separate bank account and used solely to reinstate the damaged property, or in certain circumstances, used solely to repay debt.


A DSCR of 1.00 or higher implies that the business should be able to pay its debts when due, whilst a DSCR less than 1.00 indicates that the business has negative cashflow and can’t pay its debts, assuming that the DSCR calculation includes all cash movements. To allow some buffer, banks will usually include a covenant that the DSCR has to remain above a higher threshold (maybe 1.05 or 1.2) with the level of that threshold being dependent on the type of business and how variable its earnings are.
If you have an interest-only loan, then the DSCR will be the same as the Interest Cover Ratio or ICR.

See also:

Interest Cover Ratio
Loan life cover ratio
Net vs gross

Brendan WalpoleDebt service cover ratio

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