Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
DSCR is annual net operating income divided by annual debt service, the principal and interest due in a year. The OCC’s handbook for examiners describes it as the measure of a borrower’s ability to service its debt. For a business loan the top number is usually cash flow such as EBITDA instead of property income.
Example: a building with net operating income of $150,000 and loan payments of $120,000 a year has a DSCR of 1.25. Every dollar of debt service is covered by $1.25 of income.
Each lender sets its own minimum, and the OCC notes that a longer amortization or uneven income, as at a hotel, can call for a higher ratio. One published floor is SBA’s: for a standard 7(a) loan, coverage of 1.15 or more on a historical or projected basis and 1 to 1 on a global basis, and 1.10 to 1 for 7(a) small loans. A loan agreement may also test DSCR each year as a covenant, on a formula that can differ from the one used at underwriting.
How it shows up in the data here
Not in any public file. No call report, HMDA record or SBA loan row carries a borrower's DSCR, so nothing on a lender page here shows the coverage a lender asked for. Work out yours with the DSCR calculator, then ask each lender what ratio it needs for your property or business type.
Go further
- DSCR calculator: Coverage from income, expenses and loan terms you enter.
- Maximum loan calculator: The loan a given coverage ratio supports.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- Maximum loan calculator: The loan each test allows: DSCR, LTV and debt yield side by side, and which one binds.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
- Global cash flow, explained step by step: A property can cover its loan while the people behind it cannot cover their other debts. Global cash flow is the test that looks at all of it at once.
Related terms
- Net operating income (NOI): A property's annual income minus its operating expenses, before loan payments, income taxes and depreciation. It is the top number in DSCR and debt yield.
- Debt yield: Net operating income divided by the loan amount, shown as a percent. It measures how much income stands behind each dollar lent, whatever the rate or term.
- Loan constant: One year of loan payments divided by the loan amount, shown as a percent. It folds the interest rate and the amortization period into a single number.
- Global cash flow: The combined cash flow of a borrower, its owners and their other businesses, set against all of the debt payments those same parties owe.
- Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
- Loan covenant: A promise in a loan agreement that the borrower will do certain things, or will not, for as long as the loan is outstanding, such as keeping a minimum debt service coverage ratio.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.