How do you calculate the debt service coverage ratio?

Divide the cash the business has available for repayments by a year of repayments. Cash available is usually net profit before tax, plus interest and depreciation, minus tax paid and owner drawings. Debt service is a year of interest and principal on every loan, hire purchase and equipment finance agreement. $130,000 of cash available against $60,000 of repayments is a DSCR of 2.17x.

What is a good DSCR for a small business loan?

Many lenders look for at least 1.25x, and some ask for 1.5x for riskier businesses. The exact figure is in the loan offer or covenant. Below 1.00x, trading does not cover the repayments. Aim for enough headroom that an ordinary bad year would still pass.

Is DSCR the same as cash flow cover or interest cover?

Cash flow cover and debt service cover ratio are usually the same idea. Interest cover is different: it divides profit by interest only and leaves out principal, so a business can have high interest cover and still struggle to make its repayments.

Why add back interest and depreciation?

Interest is part of the repayments being tested, so it is added back to avoid counting it twice. Depreciation is an expense in the profit and loss but no cash leaves the business, so it is added back too.

Where do I find these figures in Xero?

Net profit, interest and depreciation are on the Profit and Loss report for the last full year. Tax paid and drawings are in the Statement of Cash Flows or the account transactions. Repayments are in your loan statements, or the loan and hire purchase accounts on the Balance Sheet.

Are my figures stored or sent anywhere?

No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

DSCR calculator: how much can my business borrow?

How the calculator works

Cash available = net profit before tax + interest + depreciation and amortisation − income tax paid − owner drawings or dividends.
DSCR = cash available ÷ a year of loan repayments (interest and principal).
Most repayments a lender would accept = cash available ÷ the DSCR it requires (1.25 unless you enter another).
Room = that figure − the repayments you make today.
Most new loan = the loan whose monthly repayments use up the room, at the rate and term you enter (a standard amortising loan).

This is the common small business version. Lenders word their definitions differently: some take off spending on equipment or changes in working capital, some leave drawings in. CFADS: cash flow available for debt service walks through the variations, and cash flow cover covers the ratio as UK and Australian banks write it.

A worked example

A joinery company in Christchurch wants a new CNC machine. Made-up figures for its last year, in NZ$:

Cash available: net profit before tax $120,000 + interest $14,000 + depreciation $26,000 − tax paid $30,000 = $130,000. The owner is paid a salary through the profit and loss, so there are no extra drawings.
DSCR today: $130,000 ÷ $60,000 of yearly repayments on the van loans and an existing machine = 2.17x.
Most repayments at 1.25x: $130,000 ÷ 1.25 = $104,000 a year.
Room: $104,000 − $60,000 = $44,000 a year, or $3,667 a month.
Most new loan: $3,667 a month at 9% over 5 years repays about $176,636.
The machine they want costs $200,000. Borrowing all of it means $49,820 a year of repayments, and DSCR falls to $130,000 ÷ $109,820 = 1.18x: below 1.25x. A $25,000 deposit, or a 7-year term, brings it back within reach.

Today the company has $55,000 of headroom: cash available could fall 42% before its current repayments break 1.25x. Press "Load the worked example" above to see these figures in the calculator.

If the answer is "not enough"

Raise cash available, not just profit: how to improve cash flow in a small business lists the changes that show up within a year.
Lower the repayments: a longer term, a balloon payment or refinancing old loans together. Each costs more interest in total, so compare the total cost too. Cash flow loans for small business shows what they really cost.
Put in a deposit or borrow less, and check the result with the "loan you are considering" box.
Check the purchase pays for itself before you borrow for it: the payback period calculator shows how many months a machine or van takes to earn back its cost, with the loan's interest.
Check you can afford it month to month, not only on a yearly ratio: the cash runway calculator shows how long the bank balance lasts if a month goes badly.

Finding the figures in Xero

Run Accounting › Reports › Profit and Loss for the last full financial year. Net profit, interest and depreciation are lines on it. How to read a profit and loss in Xero explains each section.
Tax paid and drawings are in the statement of cash flows, or in the account transactions for your tax and drawings accounts.
For repayments, use your loan statements; the loan and hire purchase accounts on the balance sheet show what is still owed.

Questions

How do you calculate the debt service coverage ratio?: Divide the cash the business has available for repayments by a year of repayments. Cash available is usually net profit before tax, plus interest and depreciation, minus tax paid and owner drawings. Debt service is a year of interest and principal on every loan, hire purchase and equipment finance agreement. $130,000 of cash available against $60,000 of repayments is a DSCR of 2.17x.
What is a good DSCR for a small business loan?: Many lenders look for at least 1.25x, and some ask for 1.5x for riskier businesses. The exact figure is in the loan offer or covenant. Below 1.00x, trading does not cover the repayments. Aim for enough headroom that an ordinary bad year would still pass.
How much can my business borrow?: Divide cash available by the ratio the lender requires to get the most repayments it will accept, take off your current repayments, and work out what loan those spare repayments would pay off at the rate and term on offer. The calculator does all three steps.
Is DSCR the same as cash flow cover or interest cover?: Cash flow cover and debt service cover ratio are usually the same idea. Interest cover is different: it divides profit by interest only and leaves out principal, so a business can have high interest cover and still struggle to make its repayments.
Why add back interest and depreciation?: Interest is part of the repayments being tested, so it is added back to avoid counting it twice. Depreciation is an expense in the profit and loss but no cash leaves the business, so it is added back too.
Where do I find these figures in Xero?: Net profit, interest and depreciation are on the Profit and Loss report for the last full year. Tax paid and drawings are in the Statement of Cash Flows or the account transactions. Repayments are in your loan statements, or the loan and hire purchase accounts on the Balance Sheet.
Are my figures stored or sent anywhere?: No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This calculator gives an estimate from the figures you enter. It is not financial advice, and a lender's decision also depends on security, credit history and its own definitions. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

Debt service coverage ratio calculator

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