The debt service coverage ratio tells lenders whether cash flow comfortably covers loan payments. Test coverage against a covenant minimum, see how far cash flow can fall before a breach, and size the maximum supportable loan.
How it works
Test whether cash flow covers scheduled principal and interest, measure the cushion against a covenant minimum, and size the maximum loan the cash flow can support.
DSCR = Cash flow available for debt service ÷ Annual debt service
Maximum debt service = Cash flow ÷ Minimum DSCR
Maximum loan = PV of (Maximum debt service ÷ 12) monthly payments at the sizing rate and term
Decline before breach = 1 − (Minimum DSCR × Debt service ÷ Cash flow)Common uses
- Commercial real estate and business loan underwriting
- Covenant compliance monitoring
- Refinancing and debt capacity analysis
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Cash flow available for debt service | $2,400,000 |
| Annual debt service (principal + interest) | $1,650,000 |
| Covenant / lender minimum DSCR | 1.25 × |
| Interest rate for loan sizing | 7% |
| Amortization for loan sizing | 25 years |
| DSCR | 1.45× |
| Cushion vs. minimum | 0.20× |
| Cash flow decline before breach | 14.1% |
| Maximum annual debt service | $1,920,000 |
| Debt service headroom | $270,000 |
| Maximum supportable loan | $22,637,905 |
Cash flow could fall 14.1% before the 1.25× minimum is breached.
Interpreting the results
- Lenders commonly require 1.20× to 1.35× for commercial real estate and 1.25× or more for operating companies.
- Always apply the covenant definition in the loan agreement; adjustments to EBITDA and the treatment of capital spending vary.
- Test coverage on a trailing and a forward-looking basis, since covenants are often measured quarterly on trailing results.
Frequently asked questions
What is a good debt service coverage ratio?
Most lenders require at least 1.20× to 1.35× for commercial real estate and 1.25× or more for operating businesses. A DSCR below 1.0× means cash flow does not cover scheduled principal and interest.
What cash flow is used in the DSCR?
Real estate lenders typically use net operating income. Business lenders often use EBITDA or a covenant-defined measure that may deduct unfinanced capital expenditures, taxes or distributions. Always follow the definition in the loan agreement.
How is the maximum loan amount calculated?
Divide cash flow by the minimum DSCR to find the largest annual debt service the lender will accept, then calculate the loan amount whose payments equal that figure at the quoted interest rate and amortization period.
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