emsenn.net on relations and things
About this site

Debt Service

The total principal and interest payments a business must make on its outstanding loans — and the ratio (DSCR) that measures whether operating income can cover those payments.

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 $50,000 term loan at $842/month and a $12,000 equipment loan at $258/month, total monthly debt service is $1,100 — or $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.

Relations

Date created
Date updated
Governs
Cash flow statement
Measures
Line of credit
Part of
Business disciplines finance terms
Tags

Cite

@misc{emsenn2026-debt-service,
  author    = {emsenn},
  title     = {Debt Service},
  year      = {2026},
  note      = {The total principal and interest payments a business must make on its outstanding loans — and the ratio (DSCR) that measures whether operating income can cover those payments.},
  url       = {https://emsenn.net/library/business/domains/finance/terms/debt-service/},
  publisher = {emsenn.net},
  license   = {CC BY-SA 4.0}
}