Debt service is the total amount of principal and interest a business pays on its loans during a given period. If a business has a 842/month and a 258/month, total monthly debt service is 13,200 annually.
The debt service coverage ratio (DSCR) measures the business’s ability to make these payments:
DSCR = Net operating income ÷ Annual debt service
A DSCR of 1.0 means the business earns exactly enough to cover its loan payments — no margin for a bad month. A DSCR of 1.5 means 50% more income than required, providing a safety cushion. Lenders typically require a DSCR of 1.25 or higher to approve a loan.
When evaluating a loan offer, calculate the DSCR using your financial projections — not just at steady state, but during the ramp-up months when revenue is lowest. If the DSCR drops below 1.0 during months 2–4, the business will need working capital reserves to cover the gap between operating income and debt payments. See Financing and Debt Management.