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Definition
DSCR
Debt Service Coverage Ratio — measures whether earnings cover loan repayments.
Definition
Debt Service Coverage Ratio (DSCR) is the ratio of a business's annual earnings to its annual loan repayment obligations. A DSCR of 1.0 means earnings exactly cover repayments. Below 1.0 means the business cannot service the acquisition debt from its own earnings — a deal-breaker for most lenders.
Formula
DSCR = Annual Earnings ÷ Annual Debt Service (PMT)
Worked Example
A business earns $150,000/year. The acquisition loan costs $100,000/year in principal and interest. DSCR = 150,000 ÷ 100,000 = 1.5x. Most lenders require a minimum of 1.25x–1.4x depending on the industry.
Related Terms
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