Understanding DSCR: The Key to Business Loan Approval

How mastering your Debt Service Coverage Ratio unlocks better financing options for your business

What is DSCR and Why It Matters

The Debt Service Coverage Ratio (DSCR) is a financial metric lenders use to determine your business’s ability to pay back debt. It compares your net operating income (NOI) to your total debt payments (principal + interest).

DSCR formula:

• A DSCR of 1 means your income just covers your debt.

• Greater than 1 means you have a cushion.

• Less than 1 is a warning sign lenders may reject your application.

Why Lenders Focus on DSCR

Lenders want to be sure your business generates enough cash flow to repay debt without jeopardizing operations. A strong DSCR means less risk and often results in:

• Lower interest rates

• Larger loan amounts

• Longer repayment terms

How to Calculate Your DSCR

To calculate your DSCR, you need:

• Net Operating Income (revenue minus operating expenses)

• Annual debt payments (principal + interest)

Example:
If your NOI is $150,000 and annual debt payments total $120,000:

This 1.25 ratio is typically considered a minimum for most lenders.

Ways to Improve Your DSCR Before Applying

Improving DSCR can boost loan approval chances and secure better terms:

• Increase revenue by growing sales or diversifying income

• Reduce operating expenses without sacrificing quality

• Refinance existing debt to reduce payments

• Delay new debt until cash flow strengthens

DSCR’s Impact on Different Loan Types

• Term Loans: DSCR is critical; lenders often require 1.25 or higher

• SBA Loans: Minimum DSCR varies; sometimes as low as 1.15

• Asset-Based Loans: DSCR may be less critical if assets sufficiently collateralize the loan

• Revenue-Based Financing: DSCR is less important as payments fluctuate with revenue

How Sterlas Capital Helps You Navigate DSCR Requirements

We analyze your financials to:

• Calculate and interpret your DSCR

• Identify opportunities to improve your ratio

• Match you with lenders aligned with your DSCR profile

• Structure deals that leverage strengths and minimize weaknesses

Ready to Strengthen Your Financing Position?

Understanding DSCR empowers you to negotiate better loan terms and confidently pursue capital for growth.

📩 Contact Sterlas Capital at info@sterlasvan.com to schedule a DSCR-focused funding consultation.

Let’s position your business for financial success.