DSCR is short for debt service coverage ratio.
DSCR measures the ratio of available cash flow to debt payments (principal and interest). It is a measure used by banks and other lenders to be sure you have enough cash flow to pay your loans. Many times lenders will put in thier loan agreements requirements that a borrower maintain a certain DSCR ratio. These requirements are also known as loan covenants. Failing to maintain certain loan covenants could have some significant negative consequences (sometimes financial penalties or the potential of the loan being called).
To calculate DSCR, first you need to know your cash flow. How cash flow will be determined will generally be defined by the loan document. For our example, let’s assume we have cash flow of $20,000. Second, we need to know the debt payments, which will also be defined in the loan document. Let’s assume we have debt payments of $10,000. In this example, the DSCR would be 2 to 1 ($20,000 / $10,000).
Many banks and lenders today require a minimum DSCR of 1.2 to 1.
A DSCR of 1 to 1 would mean there is just enough cash flow to make the debt payments with nothing left over after the debt payments. Lenders generally don’t like this because it doesn’t leave much room for error. In theory, a DSCR of less than 1 to 1 means you are using your savings to make the debt payments or you need to borrow new money to pay off the old debt. Essentially you are not making enough money to pay your debts.