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DISCLAIMER: This article was written in 2020 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.

## Why You Should Calculate Your Debt Service Coverage Ratio (DSCR) Now For 2022

A small business’s debt service coverage ratio, or DSCR, is an important financial ratio used to show the extent to which your business is able to cover its debt obligations. It seems fairly obvious, but it’s important for lenders, investors, and company executives to have a firm idea of whether that company can make payments on its loans.

## Calculating Debt Service Coverage Ratio

DSCR is, predictably, a ratio. To perform a DSCR calculation, you’ll first need to calculate your company’s EBITDA – its earnings before interest, taxes, depreciation and amortization. You can find an EBITDA calculator here. Essentially, EBITDA measures the pure operating costs of a company. How much money it’s bringing in without considering anything related to debt or accounting. Once you’ve calculated EBITDA, you divide that number by the company’s total debt service. That ratio is your DSCR.

### Examples:

Business A: EBITDA – \$400,000 Total Annual Debt Payments – \$120,000 DSCR = 400,000 / 120,000 = 3.33 Business B: EBITDA – \$2,100,000 Total Annual Debt Payments – \$850,000 DSCR = 2,100,000 / 850,000 = 2.47

## What’s a good DSCR?

There isn’t a particular set point where a bad debt service coverage ratio ends and a good one begins. There’s no minimum DSCR, and there’s no maximum. The higher the ratio, the better, though. The higher the DSCR is, the more cash flow leeway the company has after making its annual necessary debt payments. A DSCR over 1.0 means that the company’s net operating income is greater than its debt obligations, while a DSCR below 1.0 means that it isn’t making sufficient cash to cover its debt.

## Who Needs To Calculate Their Debt Service Coverage Ratio (and Why)?

A company’s DSCR, like its EBITDA, total operating expenses, or any other signifier of a company’s financial performance, is an insightful and helpful way to track your company’s financial health overall. The factors that make the DSCR improve – an increase in net income, a decrease in current debt obligations – are factors are beneficial for the company in general. Working to improve a DSCR means working to improve your company as a whole. But DSCR is also an effective way to calculate whether your company can take on additional debt. Many lenders take it fully into account while deciding whether to offer the company a loan (and at what terms).

## How Often Should I Calculate DSCR (and Why?)

You never know when something could go awry with your business. A piece of equipment might break down and require repair or replacement. You may need to hire additional employees or move into a larger piece of real estate. By keeping abreast of your financial statements and frequently recalculating DSCR, you can stay ahead of the game. Because if and when an unexpected expense comes up, you want to make sure you have enough income to continue making the interest payments and lease payments you’ve kept up on while also accounting for new loan payments. Because DSCR measures your net income against your debt, it can be a useful measuring stick for the financial health of your company. If you focus on improving DSCR, you’ll likely be making wise choices for your company’s financial future.