Debt Service Coverage Ratio (DSCR)

DSCR goes further than interest coverage by including principal repayments. It shows whether a borrower generates enough cash to meet all its scheduled debt payments.

For example, a property generating net operating income of 300,000 a year, with annual loan payments of 280,000, made up of 60,000 interest and 220,000 principal, has a DSCR of about 1.07. It produces only slightly more cash than needed to make its debt payments.

A DSCR above 1 means income covers debt payments. Lenders usually require a margin of safety, often a minimum of around 1.2 to 1.5, depending on the type of loan and the stability of the income. A DSCR below 1 means the borrower cannot meet its payments from income alone.

DSCR is widely used in commercial property lending, project finance and corporate loans. Lenders often set a minimum DSCR as a loan covenant and test it regularly.

The exact definition of cash available for debt service varies by context. It may be net operating income for a property, or EBITDA adjusted for taxes and capital spending for a company.