Answers ~5 min read Updated
What DSCR Do Banks Require for a Business Loan?
Most banks want a debt service coverage ratio of at least 1.25. Here is what that means, how banks calculate it, and how to raise yours before you apply.
Most banks require a debt service coverage ratio (DSCR) of at least 1.25 for a business loan. That means your business makes $1.25 in cash flow for every $1.00 of loan payments due in a year. Large national banks sometimes accept 1.10 to 1.15. Anything below 1.00 means the business can't cover its payments, and most banks will say no.
DSCR is the single most important number in commercial lending. If you only learn one ratio before you apply, learn this one.
The DSCR formula
DSCR = cash flow ÷ annual debt service
- Cash flow is usually EBITDA: earnings before interest, taxes, depreciation, and amortization. It's a rough measure of the cash your operations produce.
- Annual debt service is every principal and interest payment due in the next 12 months, on all loans. That includes the new loan you're asking for.
Example: your business has $1,500,000 of EBITDA. Your loan payments for the year, including the new loan, add up to $1,000,000. Your DSCR is 1.50.
Your debt service coverage
1.50×Excellent debt service coverage ratio
Strong coverage. At 1.50× and up, you’re in line for better pricing and more flexibility.
What banks consider a good DSCR
| DSCR | How a lender reads it |
|---|---|
| Below 1.00 | Not enough cash to cover payments. Usually a decline. |
| 1.10 to 1.15 | The minimum at many large national banks. |
| 1.25 | The standard minimum at most regional and community banks. |
| 1.50 and up | Excellent. Can earn better pricing and looser terms. |
Why the bank's DSCR is lower than yours
Owners often calculate a strong DSCR and then get surprised. Here is why the bank's number comes out lower:
- Owner distributions come out. Money you take out of the business can't pay the loan, so banks subtract it.
- One-time gains come out. A big asset sale or an unusual contract doesn't count as repeatable cash flow.
- The new loan goes in. The bank adds the payment on the loan you're requesting to your existing payments.
- Your personal debts may count too. Many banks run a "global" DSCR that combines the business with each owner's personal income and debts.
Ask your banker to show you their calculation. Their number is the one that decides your loan.
How to raise your DSCR before you apply
There are only two levers: more cash flow, or smaller payments.
- Pause distributions for two quarters before you apply. This raises the cash flow the bank counts.
- Stretch expensive short-term debt into a longer term loan. Lower payments lift DSCR without earning one more dollar.
- Pay off the most expensive debt first, especially anything with daily or weekly payments.
- Collect faster. Cash stuck in unpaid invoices can't cover payments.
- Ask for a longer amortization on the new loan, which lowers its annual payment.
Run your own number in the free DSCR calculator, then read Chapter 3 for the other four ratios banks check.
Common questions
What is the minimum DSCR for a business loan?
Most regional and community banks want a DSCR of at least 1.25. Some large national banks will go as low as 1.10 to 1.15 for strong borrowers. Below 1.00 means the business cannot cover its loan payments from operations, and most banks will decline.
Is a DSCR of 1.2 good?
A DSCR of 1.20 is close to the line. It can be approved, especially with steady history, strong collateral, and good credit, but many banks set 1.25 as their policy minimum. A 1.20 with consistent cash flow is often viewed better than a 1.40 from one unusually good year.
Do banks use EBITDA or net income for DSCR?
Most banks start with EBITDA, then adjust it. They usually subtract owner distributions and one-time gains, and may add back documented one-time expenses. That is why the bank's DSCR is often lower than the number an owner calculates.
Is DSCR for a business loan the same as a DSCR loan?
No. A "DSCR loan" usually means a real estate investor mortgage that qualifies on a rental property's income. For a business loan, DSCR measures whether your company's operating cash flow covers all of its loan payments.