DSCR (debt service coverage ratio) is calculated by dividing the cash flow your business has available to pay debt over a year by its total debt payments for that year (principal plus interest). If the result is above 1.00, your business generates more than it owes in payments; below 1.00, it falls short. Banks and SBA lenders use it to decide whether you can take on a new loan.
This calculator works on paper or in a spreadsheet: below you'll find the formula, a full worked example in a table, how to read the result, the reverse calculation that tells you what payment you can afford, and the adjustments lenders make. If you just want the concept first, read what DSCR is.
Key takeaways
- Formula: DSCR = cash flow available for debt service ÷ annual debt payments (principal plus interest).
- A DSCR below 1.00 means your cash flow doesn't cover your payments.
- Include the payment on the new loan you're requesting, not just your current debts.
- Each lender sets its own minimum; ask what number it uses and whether it measures business DSCR or global DSCR with the owners.
- The reverse calculation shows what monthly payment fits before you request quotes.
- Revenue-based funders, like our recommended funder, look mainly at your sales and deposits.
The DSCR formula, explained
DSCR = cash flow available for debt service ÷ annual debt service
- Cash flow available for debt service. What's left from your sales after operating expenses, before any debt payments. Many lenders start from net income and add back depreciation, amortization and interest, because those aren't cash costs of running the business (or because interest is already in the denominator).
- Annual debt service. The total of all debt payments for the year: business loans, equipment financing, business vehicle loans, the minimum card payments the bank chooses to count and, most importantly, the payment on the loan you're applying for.
Use the same 12 months for both numbers. If you compare cash flow from a good year with today's payments, the result will mislead you.
Worked example, step by step
| Step | Item | Example |
|---|---|---|
| 1 | Annual sales (from your tax return or financial statements) | $400,000 |
| 2 | Minus operating expenses (rent, payroll, supplies, utilities), excluding debt payments, interest and depreciation | $310,000 |
| 3 | = Cash flow available for debt service | $90,000 |
| 4 | Annual payments on your current debts (principal plus interest) | $30,000 |
| 5 | Annual payment on the new loan, from the quote (for example, $3,000 a month) | $36,000 |
| 6 | = Total debt service (step 4 + step 5) | $66,000 |
| 7 | DSCR = step 3 ÷ step 6 | 90,000 ÷ 66,000 = 1.36 |
All numbers are an example. A DSCR of 1.36 means that for every $1 you have to pay during the year, your business generates $1.36 of available cash flow.
In a spreadsheet: put sales in cell B1, operating expenses in B2, current payments in B4 and the new payment in B5. In B3 type =B1-B2, in B6 type =B4+B5 and in B7 type =B3/B6. Change the new payment and you'll instantly see how your DSCR moves. Add a row for each quote you receive so you can compare offers side by side before you talk to anyone.
How to read your result
| DSCR | What it means | How a lender usually reads it |
|---|---|---|
| Below 1.00 | Your cash flow doesn't cover your debt payments | Very hard to approve without another source of repayment |
| Exactly 1.00 | Just enough, with no margin | Risky: one slow month and a payment is missed |
| Slightly above 1.00 | A small margin | Depends on the lender and the rest of your profile |
| Well above 1.00 | A cushion for slow months | More comfortable for most lenders |
There's no single official number: each bank and each program sets its own minimum. Ask your lender what DSCR it uses and how it calculates it (historical, projected or global with the owners).
A seasonal business example
Imagine, for example, a landscaping company that sells strongly from April to October and very little in winter. Its annual DSCR can look comfortable, but in January the payments keep coming and the sales don't. Run the calculation by quarter too: add up the cash flow and payments for your three slowest months and divide the same way. If the result drops below 1.00 in those months, you need a seasonal reserve, payments that flex with your sales or a longer term. Bringing that calculation to the bank shows you know your business.
Common calculation mistakes
- Forgetting the new loan payment and calculating with current debts only.
- Using sales instead of available cash flow: sales don't pay debt, what's left after expenses does.
- Mixing periods: a year of cash flow against monthly payments.
- Counting cash that doesn't show up on tax returns or in deposits.
- Ignoring cash advances with daily or weekly payments.
Beyond the number, the lender looks at the trend. A DSCR that rises year over year carries more weight than a high one that's been falling. And if your business has strong and slow seasons, be ready to explain how you make payments in the slow months.
The reverse calculation: what payment can you afford?
Before you ask for quotes, flip the formula. If you know your available cash flow and the DSCR you want to keep, you can calculate your maximum debt service and, from there, the payment that fits:
| Step | Item | Example |
|---|---|---|
| 1 | Cash flow available for debt service | $90,000 |
| 2 | DSCR you want to maintain (your target or the bank's), for example | 1.25 |
| 3 | Maximum debt service = step 1 ÷ step 2 | 90,000 ÷ 1.25 = $72,000 |
| 4 | Minus current debt payments | $30,000 |
| 5 | = Room for a new annual debt payment | $42,000 (about $3,500 a month) |
With that number you know which monthly payment fits before you request quotes, instead of falling for an amount your cash flow can't support. To test different loan amounts and terms against that payment, use the business loan affordability calculator.
Adjustments lenders make (and you should anticipate)
- Owner's salary. If you pay yourself a salary, it's already in your expenses. If you don't and you live on draws, the bank may subtract a reasonable amount for your personal living costs. That lowers your available cash flow.
- Global DSCR. Some lenders add the owners' personal income and debts (mortgage, car, cards) to the business calculation. A healthy business with heavily indebted owners can come out tight.
- One-time expenses. An unusual repair or a one-off legal cost may be added back if you document it. Keep invoices and a short explanation.
- Unreported cash income. It doesn't count. If it's not on your tax returns or in your deposits, it doesn't exist to the bank. Deposit everything and report everything.
- Cash advances with daily payments. Many lenders count them as debt; add them to annual debt service.
- Projections. For new businesses or business acquisitions, DSCR may be calculated from projections. Explain every assumption.
For another angle on the ratio, read our debt service coverage ratio guide, and if you're sizing an SBA loan, also use the SBA loan calculator.
How to raise your DSCR before you apply
- Ask for a longer term. The same amount over more months lowers the annual payment and raises your DSCR. Just don't let the term exceed the useful life of what you're buying.
- Borrow less or put money down. A smaller amount means a smaller new payment.
- Clear small debts with high payments using your own cash, if you can, before you apply.
- Separate your accounts. Run all sales through the business account so your real cash flow shows in full.
- Review personal expenses run through the business. Personal costs paid by the company lower your profit on paper.
- Wait to close a strong year if the last one was unusual and you can afford to wait.
If your DSCR comes out tight
A tight DSCR doesn't always close every door. Banks and the SBA weigh it heavily, but revenue-based funders look mainly at your recent sales and deposits. Merchant Fund Express, our recommended funder, reviews your deposits, not just your credit, with amounts from $5,000 to $5,000,000, credit from FICO 500 and decisions often in 2 to 4 hours; it accepts applicants with an ITIN (no SSN needed) and offers Spanish-speaking support. You can apply with Merchant Fund Express for free with no impact to your credit. Still, run this calculation first: if your cash flow can't support a new payment, no financing fixes that. If you qualify for a bank or SBA loan, it usually costs less. Prefer Spanish? Leer en español.
Frequently asked questions
How do you calculate DSCR for a small business?
Divide the cash flow your business has available to pay debt over a year by its total debt payments for that year, principal plus interest, including the new loan you're requesting. For example, $90,000 of available cash flow divided by $66,000 of payments gives a DSCR of 1.36.
What DSCR do banks require?
There's no single number: each bank and program sets its own minimum, and some use a global DSCR that includes the owners. What they all share is that it must be above 1.00, with margin for slow months. Ask your lender what minimum it uses and which period it measures before you apply.
Can I get a business loan with a low DSCR?
With a bank or an SBA loan it's difficult, because DSCR carries a lot of weight. Some revenue-based funders look mainly at your recent sales and deposits. Merchant Fund Express reviews your deposits with credit from FICO 500. Even so, make sure the new payment actually fits your cash flow before you sign anything.
Do I add back depreciation when calculating DSCR?
Generally yes, because depreciation is an accounting expense that doesn't leave your bank account. The same usually goes for amortization. Interest is added back to cash flow because it's already included in the debt payments. Each lender has its own method, so ask how yours handles these items.
Which debts go into debt service?
Every business debt payment for the year: loans, equipment financing, business vehicles, drawn lines of credit and cash advances, plus the new loan. If the lender calculates a global DSCR, it will also add the owners' personal debts, such as a mortgage, car loan or credit cards.
Is DSCR the same as ability to repay?
They're related. DSCR compares annual cash flow with annual debt payments in a single number. Ability to repay is usually looked at month by month: how much comes in, how much goes out and how much is left for a new payment. It's worth checking both before you apply.