How to Calculate Debt Service Coverage Ratio (DSCR)

If you’re looking to obtain a loan to finance commercial property, one important metric you’ll need to provide your lender with is the DSCR, or debt service coverage ratio. The DSCR shows how well you will be able to repay the loan, and helps your lender determine the size of the loan. You can calculate it by dividing your business’s net operating income (NOI) by the total debt service.

Debt Service Coverage Ratio (DSCR) = Net Operating Income (NOI) / total debt service

A DSCR of 1.0 means that you’ll be able to pay back your loan with no wiggle room. Obviously, this is not ideal. The DSCR requirement varies by lender, loan type, and property type, but it will always be above 1.0 to provide a cushion in case something goes wrong.

Calculating your NOI

Your NOI is defined as your company’s earnings before interest and taxes, and is used to show how well your company is performing. You can calculate it by subtracting your total operating expenses from your total operating revenue.

Net Operating Income (NOI) = total operating revenue – total operating expenses

Your operating revenue is simply how much money you make from selling your goods and services. Your operating expenses are the day-to-day costs of maintaining your business. This includes the cost of stocking your inventory, paying your workers, utility, supplies, and advertising.

For example

Step 1: Calculate your NOI

Let’s say last year your business made $500,000 just from selling your products. However, you had to spend $350,000 to pay your workers, obtain your products, and pay your bills and taxes. After plugging these values into the NOI equation, you find that your net operating income is $150,000.

Step 2: Calculate your DSCR

After calculating your NOI, you find that your total debt service for the same year was $100,000. After plugging your NOI and total debt service into the DSCR equation:

150,000 / 100,000 = 1.5

you find that your debt service coverage ratio is 1.5, giving you plenty of cushion to pay back your loan.

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For more information on your DSCR, check out the following links:

On why it’s important

On special cases

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