The debt service coverage ratio measures whether a business generates enough operating income to cover its debt payments, and it is the primary metric most lenders use to assess whether it can support additional borrowing.

DSCR is calculated by dividing net operating income by total debt service, principal and interest payments due in the period. A ratio of 1.0 means the business earns exactly enough to cover its debt obligations. Lenders typically require a minimum of 1.20 to 1.25, providing a cushion against revenue variability. A ratio below the covenant minimum gives the lender the right to review the relationship and potentially restrict access to the facility.

For business owners, DSCR is both a borrowing metric and a financial health indicator. A DSCR that is trending down over consecutive periods, even if still above the covenant minimum, should prompt a review of the debt structure and cash flow forecast before the lender raises it first.

Knowing DSCR before the lender calculates it is the kind of financial awareness that keeps the relationship on the business’s terms. See how Wefinx approaches Virtual CFO services.

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