1. What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to cover its loan payments with its net operating income. It's commonly used by lenders to assess the risk of lending to a business.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( NOI \) — Net Operating Income (revenue minus operating expenses)
• \( Loan\ Payment \) — Total debt service (principal + interest payments)

Explanation: A DSCR of 1 means the NOI exactly covers the debt payments. Higher than 1 indicates the business generates sufficient income to cover its debt, while below 1 indicates potential difficulty in meeting debt obligations.

3. Importance of DSCR Calculation

Details: Lenders typically require a minimum DSCR (often 1.2-1.4) to approve commercial loans. It helps assess financial health and repayment capacity.

4. Using the Calculator

Tips: Enter annual NOI and total annual loan payment amounts in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR ratio?
A: Generally, 1.25 or higher is considered good by most lenders. A ratio of 1 means break-even, while below 1 indicates negative cash flow.

Q2: How is DSCR different from debt-to-income ratio?
A: DSCR focuses on business cash flow relative to debt payments, while debt-to-income compares personal debt payments to personal income.

Q3: Can DSCR be too high?
A: Extremely high DSCR might indicate underutilized borrowing capacity, but lenders generally prefer higher ratios as they indicate lower risk.

Q4: What time period should be used for NOI?
A: Typically annual figures are used, but some lenders may look at quarterly or monthly DSCR for certain types of loans.

Q5: Does DSCR include all expenses?
A: NOI includes operating expenses but excludes taxes, interest, depreciation, and amortization (EBITDA is sometimes used instead of NOI).