How to Calculate DSCR and What Lenders Want to See

Use your last full fiscal year or the trailing twelve months, and work through these steps:

1. Start with net income from your income statement.
2. Add back interest expense, depreciation and amortization to get EBITDA.
3. Add back one-time costs you can document, such as a legal settlement, and remove one-time gains.
4. If you pay yourself less than a market salary, subtract the difference, because a lender wants the business to support a replacement operator.
5. Add up every scheduled principal and interest payment for the year, including the new loan.
6. Divide the cash flow from step 4 by the debt service from step 5.

For example, say a landscaping company reports 120,000 in net income, 30,000 in interest and 30,000 in depreciation and amortization, so its cash flow is 180,000. Say its existing loans cost 70,000 a year in payments, and a new 400,000 loan at 10 percent over ten years adds about 63,400 more. Say total debt service comes to 133,400: dividing 180,000 by that gives a DSCR of about 1.35x.

There's no single number. Lenders set minimums by loan type, collateral and industry, and your quote can differ between two banks on the same day. For example, a lender's policy might call for 1.25x, which leaves a 25 percent cushion above break-even. Treat any figure you read online as a starting point and ask for the lender's written policy.

Before you calculate anything, ask the lender these questions, because each answer moves your ratio:

• Which income basis do you use: EBITDA, net income plus depreciation, or something else?
• Do you deduct owner compensation, and at what level?
• Do you deduct income taxes, or owner distributions that cover them?
• Is the ratio measured on the business alone or on global cash flow that includes your personal debts?
• Do operating leases and equipment financing count as debt service?
• Do you test historical income, projections, or the lower of the two?

Margins shape how much debt a business can carry. In NYU Stern's January 2026 industry data, EBITDA margins run from 3.87 percent for healthcare support services to 35.93 percent for software¹. A thin-margin business needs a much smaller loan relative to revenue to reach the same ratio.

Add-backs raise the ratio and deductions lower it, and underwriters check both. Depreciation and amortization are non-cash, so they're added back almost everywhere. Interest is added back because it sits inside the debt service you're dividing by. Owner perks and one-time costs are added back only when you can document them with invoices or bank records.

The deductions are where owners get surprised. A lender may subtract maintenance capital spending, cash taxes and a market-rate salary for the owner, and any one of them can pull a comfortable ratio toward 1.0. A useful test: if your ratio only clears the bar after an add-back you invented, expect the lender to challenge it. Run the calculation twice, once with your preferred add-backs and once with only the conservative ones, and know both numbers before the meeting.

Also check what you leave out of debt service. Equipment loans, merchant cash advances and revenue-based financing all carry payments that belong in the denominator, and forgetting them is the fastest way to overstate coverage. If you're comparing a repayment-based product, the revenue-based financing cost calculator shows what its payments look like on an annual basis.

A lender will ask what happens when things go wrong, so ask first. Keep the landscaping example: cash flow of 180,000 and total debt service of 133,400.

Say the new loan is variable and its rate rises from 10 to 12 percent. In that case, say the annual payment climbs to roughly 68,900, total debt service becomes about 138,900, and DSCR falls to about 1.30x. Say instead that revenue softens and cash flow drops by a tenth to 162,000: DSCR is then about 1.21x. Say both happen together: the ratio lands near 1.17x.

That last number is the one to look at. If a combined bad year takes you below 1.0, you'd be borrowing against savings to make payments, and the loan is too large or too short for the cash flow. Seasonal businesses should run the test on their slowest trailing quarter as well, since a healthy annual ratio can hide months when payments outrun income. The SBA 7(a) loan payment calculator helps you price the payment side of each scenario.

Each lever has a cost, so pick on purpose:

• Lengthen the amortization. Payments fall, but you pay more total interest and some lenders cap the term for the asset type.
• Borrow less by putting in more equity. This is the cleanest fix and the hardest on cash.
• Pay off small loans with big payments relative to their balance, such as equipment notes or cash advances, before you apply.
• Raise prices or trim recurring costs for a few quarters so the trailing numbers improve. Lenders look at what the statements show, not what you plan.
• Add a co-borrower or guarantor with income, if the lender measures global cash flow.

For a fuller picture of the cash side of borrowing, pair this with the working capital calculator, since a loan that passes DSCR can still strain your day-to-day cash.