What Is DSCR?
DSCR stands for Debt Service Coverage Ratio. It is the single most important number in business loan underwriting. When a lender looks at your file, this is what they check first.
Here is what it measures: Can your business afford the loan payment?
That is it. DSCR compares how much money your business brings in to how much it owes in debt payments each year. If you bring in more than you owe, the number is above 1.0 and you are in the game. If you bring in less than you owe, the number is below 1.0 and you have a problem.
The formula is simple:
DSCR = Adjusted Business Income ÷ Total Annual Debt Payments
A DSCR of 1.0 means you make exactly enough to cover your debt. A DSCR of 1.25 means you make 25% more than what your debt costs. A DSCR of 0.78 means you are short. You do not make enough to cover the payments.
This is not about real estate DSCR loans. If you are looking for information about DSCR loans for rental properties (where the property's rent qualifies you instead of your personal income), we have a separate guide for that. This post is about how lenders use the DSCR ratio to decide whether to approve your business loan application.
How to Calculate DSCR (With Real Numbers)
Let's walk through a typical example. The numbers are based on real underwriting scenarios.
Step 1: Figure Out Your Adjusted Business Income
You do not use your raw net income. Lenders start with your net income and then add back certain expenses that show up on paper but do not actually represent cash leaving your business. These are called EBITDA add-backs (more on those below).
| Line Item | Amount |
|---|---|
| Net Income (from tax return) | $22,155 |
| + Depreciation | $21,278 |
| + Amortization | $2,333 |
| Adjusted Business Income | $45,766 |
Notice the difference. The tax return shows $22,155 in profit. But after adding back non-cash expenses, the business actually generated $45,766 in cash flow. That is more than double.
Step 2: Add Up Your Annual Debt Payments
This includes the new loan payment plus any existing business debt.
In this example, total business debt payments come to $4,918 per month, or $59,016 per year.
Step 3: Divide
$45,766 ÷ $59,016 = 0.78x
That is below 1.0. The business does not generate enough income (on paper) to cover its debt. This deal fails underwriting.
But wait. There is more to the story.
Business DSCR vs Global DSCR
There are two versions of DSCR that lenders calculate. Understanding the difference is critical because one of them kills deals that the other would approve.
Business DSCR
Only counts your business income and your business debt. Nothing personal.
Global DSCR
Adds your personal income (W-2, Schedule C, other earnings) AND your personal debt (mortgage, car payments, student loans, credit cards) into the equation.
Here is what both look like for the same business:
| Component | Business DSCR | Global DSCR |
|---|---|---|
| Income | $45,766 (business only) | $113,396 (business + personal) |
| Debt Payments | $59,016/yr (business only) | $203,208/yr (business + personal) |
| DSCR | 0.78x | 0.56x |
| Result | Fail | Worse fail |
The personal income helped a little (went from $45K to $113K). But the personal debt crushed it. Say the owner has an $8,500 per month mortgage plus $3,500 in other personal debt. That is $12,000 per month in personal obligations on top of the business debt.
Key Takeaway
Your business can be profitable and still fail Global DSCR. A large mortgage payment alone can tank your ratio even if the business is doing well. This happens constantly.
- Business DSCR only looks at business numbers
- Global DSCR adds personal income AND personal debt
- Personal debt is usually what kills the deal
Why the Tax Return Is What Matters
This is the part that shocks most business owners.
All conventional business loans are underwritten off your most recent filed tax return. That is the gold standard. Lenders may also ask for year-to-date financials and bank statements, but those are just a pulse check to make sure the business is still on track. The tax return is what drives the decision.
And that creates a problem.
Your CPA's job is to lower your taxes. They do that by maximizing write-offs. Depreciation, amortization, business expenses, entity losses. Every dollar they write off saves you money on taxes.
But when a lender looks at your tax return, they see that lower number. The tax return might say a business made $22,155. The year-to-date financials might show the business is actually bringing in much more cash before those tax strategies hit. Same business, two very different pictures.
That gap is real. A business that looks like it barely survives on the tax return might be throwing off strong cash flow in the current year. But if the most recent filed return shows 0.78x, that is what the lender underwrites off of.
This is why timing your tax filing matters. Once your return is filed, those numbers are locked in for underwriting. Talk to your CPA before filing about how write-offs affect your ability to borrow.
Pro Tip: A small number of lenders will underwrite on a cash flow basis using bank statements instead of tax returns. If your returns make your business look weak, ask your funding advisor about those options. Same business, same revenue, different math, different answer. But understand that tax-return-based underwriting is the standard for conventional loans.
EBITDA Add-Backs: How Deals Get Saved
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. When lenders calculate your DSCR, they do not just use the bottom line from your tax return. They add back certain expenses that do not represent actual cash going out the door.
Here is what gets added back:
| Add-Back | What It Is | Why It Gets Added Back |
|---|---|---|
| Interest | Interest paid on existing loans | Already counted in debt service. Adding it back avoids double-counting. |
| Taxes | Income taxes paid by the business | Taxes reduce your reported income but do not affect your ability to service debt. |
| Depreciation | Spreading the cost of equipment, vehicles, or property over years | It is a paper expense. No cash actually left the business this year. |
| Amortization | Spreading the cost of intangible assets (patents, goodwill) over years | Same as depreciation. Paper expense, not a cash outflow. |
| Licenses | Business licenses and regulatory fees | Non-recurring or fixed costs that do not reflect ongoing cash flow ability. |
In the example above, net income was $22,155. After adding back $21,278 in depreciation and $2,333 in amortization, the adjusted income jumped to $45,766. That is the difference between a business that looks like it barely survives and one that actually generates real cash.
Why this matters: Without EBITDA add-backs, DSCR would have been calculated on $22,155 of income. The deal would have been dead on arrival. Add-backs gave the lender a more accurate picture of what the business actually produces.
What Is a Good DSCR?
Keep it simple. There are two numbers you need to know.
A DSCR of 1.0x means your business earns exactly enough to cover every dollar of debt. Nothing left over. No margin for error. Some lenders will work with this, but it is tight. One slow month and you are underwater.
A DSCR of 1.25x means your business earns 25% more than its debt costs. That extra cushion tells the lender your business can handle a rough patch and still make payments. This is where the best rates and terms live.
Think of it this way:
- Below 1.0x: You do not make enough to cover your debt. Most lenders will not touch this.
- 1.0x to 1.24x: You are in the game, but options are limited and terms may not be great.
- 1.25x and above: You are in a strong position. Better rates, more lender options, smoother process.
Where you fall on this scale depends on your income, your debt load, and which calculation the lender runs (business vs global). The same business can land in different spots depending on those variables.
How Debt Structure Affects Your DSCR
The type of debt you carry matters just as much as the amount. Short-term, high-payment debt creates cash flow constraints that crush your DSCR even when the business is healthy.
Here is what that looks like. Say a business has two short-term loans with aggressive repayment schedules:
| Debt | Balance | Monthly Payment |
|---|---|---|
| Loan 1 | $81,000 | $7,413 |
| Loan 2 | $55,000 | $6,952 |
| Combined | $136,000 | $14,365 |
$14,365 per month. That is $172,380 per year in debt service on $136,000 of total debt. The short repayment terms are what makes the payments so high.
Now say a lender takes a chance on the deal. The business gets approved for a longer-term conventional loan that pays off both balances and restructures the debt at $4,918 per month.
That is almost $10,000 per month in cash flow relief. Same business. Same revenue. Same profit. Just a different debt structure.
When annual debt service drops from $172K to $59K, the DSCR math changes completely. The business that was tight at 1.0x now has real breathing room. And the next time they apply for financing, their DSCR tells a very different story.
The takeaway: Short-term, high-interest debt creates cash flow constraints that hurt your DSCR. It is not always about how much you owe. It is about how fast you are paying it back. Restructuring into longer-term financing with lower monthly payments does not just save money. It changes the math that determines whether you get approved for future financing.
What to Do If Your DSCR Is Too Low
If your DSCR is below where it needs to be, you have options. Here are the seven levers that can move the number:
- Restructure business debt. Pay off or consolidate existing obligations. Converting short-term, high-payment debt into longer-term financing with lower monthly payments is often the fastest way to improve DSCR.
- Reduce personal obligations. If Global DSCR is the problem, look at refinancing your mortgage to a lower payment, paying off car loans, or reducing credit card balances. Every dollar of personal debt you eliminate improves the global ratio.
- Time your application. DSCR is a snapshot based on your most recent filed return. Apply after a strong tax year. One year you fail, the next you pass.
- Add a co-borrower. Bringing on someone with income and minimal debt can boost your Global DSCR. Their income goes into the numerator without as much debt in the denominator.
- Capture all income sources. Make sure Schedule E, K-1 income from other entities, and all other income streams are reflected in the calculation. Missed income means a lower DSCR than reality.
- Work with your CPA before filing. Once your tax return is filed, those numbers are locked in for underwriting. Talk to your CPA about how entity-level returns affect your personal return's DSCR math. Tax strategy and loan strategy sometimes pull in different directions.
- Work with a broker who understands the math. Different lenders weigh Global DSCR differently. Some are stricter, some are flexible. A few will underwrite on bank statements instead of tax returns. Knowing which lender fits your situation is half the battle.
Pro Tip: DSCR changes year to year. Some businesses have entities that swing from losses to profits in a single year. If you applied six months earlier or later, the answer might be completely different. Timing matters.
Frequently Asked Questions
What is a good DSCR for a business loan?
A DSCR of 1.0x is the bare minimum. It means your business earns just enough to cover its debt payments with nothing left over. Most lenders want to see 1.25x or higher before they will approve a loan. That means your business earns 25% more than what it owes each year.
What is the difference between business DSCR and global DSCR?
Business DSCR only looks at your business income and business debt. Global DSCR adds your personal income and personal debt into the equation. Your mortgage, car payments, student loans, and credit cards all count. Global DSCR is where most deals fail because personal debt drags the number down.
Why does my DSCR look different on my tax return vs my current financials?
Your CPA writes off everything to lower your tax bill. That is smart for taxes. But lenders use the bottom line on your most recent filed tax return to calculate DSCR. More write-offs mean lower reported income, which means a lower DSCR. Your year-to-date financials may show stronger cash flow before those tax strategies are applied, but the tax return is what lenders underwrite off of.
What are EBITDA add-backs and how do they help my DSCR?
EBITDA add-backs are non-cash expenses that get added back to your net income when calculating DSCR. The main ones are interest, taxes, depreciation, amortization, and licenses. These are real expenses on paper, but they do not represent cash leaving your business. Adding them back gives a more accurate picture of how much cash your business actually generates.
Does the type of debt I have affect my DSCR?
Yes. Short-term, high-payment debt directly increases your debt service number. A business paying $14,000 per month on two short-term loans will have a much worse DSCR than the same business paying $5,000 per month on a longer-term loan for the same total balance. The structure of your debt matters just as much as the amount.
How can I improve my DSCR before applying for a loan?
You can improve DSCR by restructuring debt (converting short-term, high-payment obligations into longer-term financing), increasing income, timing your application after a strong tax year, adding a co-borrower with income and minimal debt, or working with your CPA to make sure all income sources are captured on your returns.
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