Capital & Financing

Debt Service Coverage

Learn debt service coverage, the ratio of income to debt payments that answers the only question that matters before borrowing: can the business reliably afford this debt, even in a bad month?

  • Beginner
  • 12 min total
  • 13 chapters

What decision this helps you make: How much debt a business can safely carry, set by the payment it can comfortably cover, not by what a lender will offer.

What this topic is

Debt service coverage ratio (DSCR) = operating income ÷ required debt payments. It measures whether a business earns enough to cover its debt, with a cushion.

Why it matters

It reframes borrowing from "how much can I borrow?" to "how much can I reliably repay?" A DSCR below 1.0 means income doesn't cover the debt; lenders want ~1.25+ so a slow month doesn't cause a default. It's the single best test of whether debt is safe.

Who should learn it

Any owner taking on debt. This is the discipline that keeps borrowing from becoming insolvency.

What you will understand

  • Understand DSCR and how it's calculated
  • See why a cushion above 1.0 matters
  • Know why lenders require ~1.25+
  • Set borrowing by the payment you can safely cover

Prerequisites

Common misconception

"If a lender approves the loan, the business can afford it." A lender's maximum offer is their risk tolerance, not proof your business can comfortably carry the payment. The real test is DSCR: operating income ÷ debt payments. At 1.0 you have no cushion, so any slow month causes a shortfall; below 1.0 the income doesn't cover the debt at all. Borrow to a comfortable DSCR (a real margin above 1.0), not to the lender's maximum.