What is DSCR and why is it important in business lending

DSCR = Net Operating Income ÷ Total Debt Service
(Debt Service = principal + interest + lease payments due in the period)

Why lenders obsess over it

1. Repayment radar – A single number tells them if cash flow can cover every scheduled dollar after normal operating bills are paid.

• 1.25× or higher = green light (25 % cushion).
• <1.0× = the business must borrow more just to stay current—automatic decline.

1. Risk-based pricing – Each 0.1× above 1.25× usually knocks 10–25 bps off the interest rate; below 1.25× triggers premiums, extra covenants, or larger equity injections.
2. Covenant trip-wire – Term sheets embed a minimum DSCR clause; breach moves the loan into default even if you never missed a payment.
3. Capacity yard-stick – Banks size the maximum loan by working the formula backward:
   Allowable Debt Service = NOI ÷ 1.25; anything above that line is declined or moved to a secondary lender at higher cost.
4. Early-warning system – A sliding DSCR over consecutive quarters flags trouble before it shows up in missed payments, giving both sides time to restructure.

Keep DSCR ≥1.25 and you keep cheap, covenant-light, scale-able capital in your hip pocket; let it drift below 1.0 and every door except expensive rescue capital slams shut.