1. What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial ratio that measures a company's ability to cover its debt obligations with its operating income. It's commonly used by lenders to assess a borrower's creditworthiness.

2. How Does the Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( NOI \) — Net Operating Income ($)
• \( Total\ Debt\ Service \) — Sum of all debt obligations including principal and interest payments ($)

Explanation: A DSCR of 1 means the company's NOI exactly covers its debt payments. Higher than 1 indicates the company has income left after servicing debt, while below 1 indicates insufficient income to cover debt obligations.

3. Importance of DSCR

Details: Lenders typically require a minimum DSCR (often 1.2-1.4) before approving loans. It's crucial for commercial real estate loans, business loans, and corporate finance decisions.

4. Using the Calculator

Tips: Enter accurate NOI (revenue minus operating expenses) and total annual debt service (principal + interest payments). 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 acceptable by most lenders. A ratio of 2 or more is excellent.

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

Q4: How often should DSCR be calculated?
A: For loan applications, it's calculated annually. Businesses should monitor it quarterly or when significant financial changes occur.

Q5: Does DSCR include taxes?
A: Typically no - NOI is calculated before taxes. However, some lenders may use after-tax calculations in certain situations.