Why Lenders Care About Your Debt Service Coverage Ratio (DSCR)

When you’re applying for business financing, one of the first things underwriters want to know is: Can this business actually afford the loan they’re asking for? That’s where your Debt Service Coverage Ratio (DSCR) comes in.

✅ What is DSCR?

Your DSCR measures how easily your business can cover its debt obligations with its available operating income.

The formula is simple:

DSCR = Net Operating Income ÷ Total Debt Payments

If your business brings in $150,000 a year and has $100,000 in annual debt payments, your DSCR would be:

1.5 — meaning you earn 1.5x what you need to cover debt.

📊 Why It Matters to Lenders

Lenders use DSCR to evaluate risk. A DSCR of 1.25 or higher is generally considered healthy — it shows that your business earns more than enough to manage current (and new) debt.

Here’s what your DSCR says to a lender:

• DSCR above 1.25: You’re managing debt well and likely a low-risk borrower.

• DSCR close to 1.0: You’re just breaking even. It’s not ideal, but still fundable with strong compensating factors.

• DSCR below 1.0: You’re not earning enough to cover your debts — this raises major red flags.

  
  

🧾 When DSCR Is (and Isn’t) Used

Here’s something important most business owners don’t realize:

DSCR is only calculated when your business tax returns are requested.

That means:

• If you're applying for a small, app-only loan (usually under $75K–$150K) — your DSCR probably won’t be evaluated.

• For larger loans that require tax returns (typically $150K+), your DSCR becomes a key factor in approval.

  
  

So if you’re applying for bigger funding, it’s worth getting a handle on your DSCR ahead of time.

🧠 Pro Tip: DSCR Is About Sustainability

Even if your credit is decent or your business has strong revenue, a low DSCR can be a deal breaker. Lenders want to see that your cash flow isn’t just good now, but strong enough to sustain a new monthly payment.

📌 What You Can Do

• Increase your operating income.

• Refinance or pay down high monthly obligations.

• Choose a loan structure that keeps your payments manageable.

  
  

👉 Need help calculating or improving your DSCR before applying for financing?Brilliance Funding offers free consultations to help business owners strengthen their financial profiles.