The debt service coverage ratio (DSCR) is one of the important financial ratios that tells you whether your business loan application gets a green light or a rejection stamp. And that's why lenders care about it so much. Understanding it and more importantly Improving it before you apply, can make the difference between the smooth approval and a frustrating denial
In this blog, we are going to break down what DSCR means, how to calculate it manually and digitally, what counts as a good DSCR ratio for better business loans, and practical steps you can take to improve your DSCR before you submit your loan application.
What is DSCR
Debt Service Coverage Ratio (DSCR) is a financial metric that measures a business's ability to repay its current debt obligations using its operating income. In simple words, it tells lenders: “Is the business making sufficient money to comfortably meet its debt obligations?”
Think of it like a financial health checkup, just like a doctor checks your vitals such as your blood pressure, sugar, blood report, etc. before giving you a clean bill of health; lenders check your DSCR before giving you a better business loan. A strong DSCR always indicates that your business generates enough cash flow to cover loan repayments. But a low DSCR is a sign of trouble when it comes to repaying your loan.
DSCR is used widely across secured business loans, unsecured business loans, MSME loans, and working capital loans in India, making it one of the financial ratios used in commercial lending that is most widely used.
DSCR formula: How it's calculated
The debt-to-service ratio is totally straightforward when you understand its two core components:
DSCR Formula = Net Operating Income (NOI) / Total Debt Service
Net Operating Income (NOI): This is the amount of money your company makes after operating costs are subtracted but before interest and taxes.
Total debt service: The total of all principal and interest payments that are due within a given time frame (typically a year).
NOI Formula
Net operating income (NOI) is calculated as:
NOI = Total Operating Revenue − Operating Expenses.
Salaries, rent, utilities, and raw material costs are examples of operating expenses; interest, taxes, depreciation, and amortization are not included. This is why NOI is often closely related to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in business loan assessments; both aim to capture a business's core earning power before financial and accounting adjustments.
Total Debt Service
This covers all of your debt payments that are due within the time frame under consideration, including both principal and interest.
Total Debt Service = Principal Repayment + Interest Payment
How to Calculate DSCR for a Business Loan: Manual Method.
Let's walk through every step with a practical example.
Example: Suppose your business has the following financials for the year:
Total Operating Revenue: Rs.5,000,000
Operating Expenses: Rs.3,000,000
Annual Principal Repayment: Rs.800,000
Annual Interest Payment: Rs.400,000.
Step 1: Calculate Net Operating Income (NOI) NOI = Rs.5,000,000 − Rs.3,000,000 = Rs.2,000,000
Step 2: Calculate Total Debt Service Total Debt Service = Rs.800,000 + Rs.400,000 = Rs.1,200,000
Step 3: Apply the DSCR Formula:
DSCR = NOI / Total Debt Service. DSCR = Rs.2,000,000 / Rs.1,200,000.
DSCR = 1.67
NOTE: A DSCR more than 1.25 is considered good for any better business loan.
Here the business generates 1.67 times the income needed to cover its debt obligations; it is generally considered a healthy sign for any lender evaluating your loan repayment capacity.
How to Calculate DSCR Digitally
Most of the businesses today rely on digital tools for speed and accuracy. Here's how DSCR calculation works digitally:
Spreadsheet formulas: To link NOI and Total Debt Service to your financial statement cells, you can create a straightforward Excel or Google Sheets formula: =NOI/Total Debt Service. Every time your income or expenses fluctuate, this automatically updates your DSCR.
DSCR Loan Calculator tools: Many lenders and financial platforms, including business loan eligibility calculators, allow you to input your annual income, operating expenses, and existing loan obligations to instantly generate your DSCR.
Accounting software: There is much available accounting software that can generate profit and loss statements that feed directly into DSCR calculations.
What is a good DSCR ratio for a better business loan approval?
This is the most common question every business owner asks, and for good reason: your DSCR directly impacts your business loan eligibility criteria
DSCR Value | What it means |
|---|---|
Below 1.0 | Your business doesn't generate enough income to cover debt payments (high risk for lender) |
1.0 | You're even-steven; your income just meets your debt obligations, no cushion |
1.25-1.5 | Generally considered a good DSCR ratio |
Above 1.5 | Strong financial health, often resulting in better interest rates and faster approvals |
Minimum DSCR Required for Business Loans in India
The minimum DSCR requirement for better business loans varies by lender type and loan category:
Secured business loans: Lenders often accept a slightly lower DSCR (around 1.0–1.25).
Unsecured business loans: Since there's no collateral Protecting the loan, lenders typically expect a higher DSCR, often 1.25 and above
It is important to know that DSCR requirements are not set in concrete and are dependent on the internal risk policies of the lender, the loan amount, the tenure, and the industry in which your business is operating.
What is the significance of DSCR for business loan approval?
Understanding the importance of the debt service coverage ratio (DSCR) should always be taken into consideration. Here's why it matters:
Credit evaluation: In addition to your credit score and banking history, DSCR is a crucial component of how lenders evaluate the creditworthiness of your company.
Loan risk assessment: It assists lenders in estimating the probability of default, which directly affects the interest rates and loan conditions that are presented to you.
Business loan eligibility: A strong DSCR can unlock access to higher loan amounts.
In a nutshell, we can say that DSCR is used by lenders to approve loans because it provides a direct response to the most crucial lending question: "Will this borrower be able to repay?"
How to Improve Your DSCR Before Applying for any business Loan
Here are the practical steps to improve your DSCR and boost your business loan eligibility.
Increase your net operating income.
Reduce your Unnecessary Operating Expenses
Restructure existing debt
Pay your high-interest-rate debt first
Delay large capital expenditure
Improve cash flow management
Add a co-applicant and a guarantor
DSCR vs FCCR: What's the Difference?
The Fixed Charge Coverage Ratio (FCCR) takes a more comprehensive approach by incorporating fixed charges like lease payments in addition to debt service, whereas the DSCR only considers debt obligations (principal and interest).
DSCR = NOI / (Principal + Interest)
FCCR = (EBITDA − Capital Expenditures) / (Principal + Interest + Lease Payments)
When a company has substantial lease or rental obligations, lenders may use FCCR in addition to or instead of DSCR because it provides a more complete picture of all fixed financial commitments, not just debt.
FAQs
What is meant by a 1.25 DSCR?
It means your business is making 25% more money than it needs to pay your debt. Most lenders use 1.25 as a reasonably safe minimum DSCR for business loans because it gives them a cushion in case something happens and revenue drops unexpectedly.
Can I borrow with a low DSCR?
It can be done, but it’s not easy. If your DSCR is less than 1.0, it usually tells lenders that your business may have difficulty repaying the loan. In such cases you may still qualify for a loan but expect higher interest rates, to be asked for more collateral, or to need a co-applicant to offset the risk.
What is the difference between DSCR vs. debt ratio vs. interest coverage ratio?
DSCR can be easily confused with other financial ratios used in business, so here’s a quick differentiation:
DSCR measures ability to pay both principal and interest payments with operating income
Debt Ratio A measure of the total debt as a percentage of total assets. It is a measure of the leverage of a company and does not indicate its ability to service its debt
Interest Coverage Ratio measures ability to cover only interest payments (not principal), calculated as EBIT divided by interest expense
What is the significance of DSCR
DSCR is important because it’s the simplest way for a lender to answer one question: can this business actually pay back what it borrows from what it earns without hesitation? DSCR relates current income to current debt service obligations. It indicates a lender if the business will be able to pay moving forward, not just if it’s been responsible in the past.
At Bikesh Finserv, we have seen how a well-managed DSCR can change the whole course of a business loan application. It’s not just another number hidden in your financial statements, but it’s often the one thing that is the most important to us and most lenders when it comes to loan approval, interest rates, and repayment terms.
If you are planning to apply for a business loan soon, take some time to calculate your current DSCR and strengthen your financial position first. At Bikesh Finserv, we are always there to help you understand where you stand and guide you to the right loan structure for your business.