1. What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's ability to cover its debt obligations with its 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)
• \( Debt\ Service \) — Total annual debt payments (principal + interest)

Interpretation: A DSCR of 1.0 means the company has exactly enough income to pay its debt. Above 1.0 indicates the company can cover its debt with income left over, while below 1.0 suggests insufficient income to cover debt payments.

3. Importance of DSCR

Details: Lenders typically require a minimum DSCR (often 1.25 or higher) before approving loans. A higher DSCR indicates better financial health and lower risk for lenders.

4. Using the Calculator

Tips: Enter your annual Net Operating Income and total Annual Debt Service in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR ratio?
A: Generally, lenders prefer a DSCR of 1.25 or higher. A ratio of 2.0 or more is considered excellent.

Q2: Can DSCR be less than 1?
A: Yes, but this indicates the company doesn't generate enough income to cover its debt payments, which is a red flag for lenders.

Q3: How is DSCR different from debt-to-income ratio?
A: DSCR focuses on business income and debt payments, while debt-to-income ratio typically refers to personal finance and compares all monthly debt payments to gross monthly income.

Q4: What industries have different DSCR requirements?
A: Some industries with stable cash flows (like utilities) may have lower DSCR requirements, while more volatile industries may require higher ratios.

Q5: How can I improve my DSCR?
A: You can increase NOI (through higher revenues or lower expenses), reduce debt service (by refinancing or extending loan terms), or a combination of both.