What is Debt Service Coverage Ratio?
DSCR measures whether you generate enough cash to cover all debt payments, both interest and principal. Unlike Interest Coverage which only looks at interest, DSCR captures your full debt service burden.
Why DSCR Matters
Lenders require minimum DSCR levels as loan covenants. If your DSCR falls below the threshold, you may be in technical default even if you are making payments on time. This can trigger acceleration clauses or prevent future borrowing.
For founders with revenue-based financing or term loans that require principal repayment, DSCR is the key metric to track. Interest-only debt has different dynamics than amortizing debt.
DSCR Thresholds
Lenders typically require DSCR of 1.25 or higher, meaning you generate 25% more cash than needed for debt service. Higher-risk loans may require 1.5 or even 2.0.
Formula
DSCR = Net Operating Income ÷ Total Debt Service
Total Debt Service = Principal Payments + Interest Payments
Example
Your ecommerce company has:
- Net Operating Income: $400,000
- Annual Principal Payments: $150,000
- Annual Interest Payments: $50,000
- Total Debt Service: $200,000
DSCR = $400,000 ÷ $200,000 = 2.0
You generate twice the cash needed to cover debt service. That gives lenders confidence and you breathing room.