Debt Service Coverage Ratio (DSCR)
Definition
The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a business's ability to service its debt obligations from its operating income. It is calculated by dividing Net Operating Income (NOI) by Total Debt Service (all principal and interest payments). A DSCR of 1.0 means income exactly covers debt payments. Lenders typically require a DSCR of 1.25 or higher, meaning the business generates 25% more income than needed to cover debt payments. In commercial real estate, DSCR is one of the most important qualification metrics. In SBA lending, it's a key factor in underwriting decisions.
Example
A commercial property generates $120,000 in annual net operating income. The annual mortgage payment (principal + interest) is $90,000. DSCR = $120,000 ÷ $90,000 = 1.33. This property meets most lenders' minimum DSCR requirement of 1.25.
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