What is DSCR (Debt Service Coverage Ratio)?
The Short Answer
DSCR (Debt Service Coverage Ratio) explained simply
DSCR stands for Debt Service Coverage Ratio. It's a key number lenders look at when deciding whether to give a business a loan. It tells them if a business makes enough money to pay back its debts, including both principal and interest.
Think of it like this: if your DSCR is 1.0, you're making just enough to cover your debt payments. If it's less than 1.0, you're not making enough. If it's more than 1.0, you have extra money after paying your debts. Lenders usually want to see a DSCR of 1.25 or higher, meaning the business has 25% more income than it needs to cover its debt.
Real-World Example
The Coffee Shop Loan
Imagine a coffee shop wants a loan. Their annual net operating income is $100,000. Their total annual debt payments (principal and interest) are $80,000.
DSCR Calculation: $100,000 (Net Operating Income) / $80,000 (Total Debt Service) = 1.25
A DSCR of 1.25 means the coffee shop generates 1.25 times the income needed to cover its debt payments. This is generally seen as a good sign by lenders.
Why this matters
DSCR is crucial because it shows a business's financial health and its ability to handle debt. A strong DSCR makes it easier to get loans and can even lead to better loan terms. For buyers, it helps them understand the financial risk of taking on a business's existing debt.
Always know your DSCR before talking to lenders. It's one of the first things they'll ask for. A higher DSCR gives you more negotiating power.
Always know your DSCR before talking to lenders. It's one of the first things they'll ask for. A higher DSCR gives you more negotiating power.
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