Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Debt Service Coverage Ratio compliance often is required or necessitated by covenants in a bank loan agreement. A bank loan covenant regarding the debt service coverage ratio will specify the amount of income a business and/or its guarantor must generate relative to the debt principal and interest payments on an annual basis to remain in compliance with the covenant.
The business owner, or his or her CFO or Controller, should monitor this ratio carefully on a monthly basis and know how to calculate debt service coverage ratio so their loan covenant is not unintentionally broken.
How to Calculate Debt Service Coverage Ratio?
Download this free tool to help you to understand how to calculate debt service coverage ratio.
The DSCR Calculator is a two-page workbook:
1. The first page is an Example to show how the Debt Service Coverage Ratio would be computed on a global basis for a business owner with multiple businesses.
2. The second page is where you will find a blank workbook with the formulas needed to compute Your Company’s Debt Service Coverage Ratio.
Note: You only need to enter financial information about your income, profit, depreciation, amortization, debt, and capital lease payments.
Here’s where you may download a Debt Service Coverage Ratio workbook for your private use.
Your bank loan documents will most likely specify the income and adjustments permitted when calculating the debt service coverage ratio.
Likewise, the debt components, such as principal, interest, and possibly capital leases, will be defined as well. Â
To calculate your DSCR, you will need to enter the figures in the workbook cells which are yellow. The green cells in the workbook are formulas which will calculate the totals and the Debt Service Coverage Ratio automatically.
Once you have computed your ratio, compare it to the minimum ratio defined in your bank loan agreement.
Your ratio should equal or exceed the ratio which is defined by the bank. In the example, the ratio is 2.54 and would exceed the ratio most banks require which is approximately 1.25.
Hey holly,
for example i want to calculate DSCR for each quarter so do i need to add the previous cashflows on just take the profit of that particular quarter
Hi Anil,
If you want to measure the DSCR for a single quarter, then you would include the cash flow in the numerator and the debt service in the denominator for only the quarter period as opposed to the full year.
All the best…
IS INTEREST PAID ON CASH CREDIT OR OVERDRAFT FORMS THE PART OF DEBT OBLIGATION???
Hi Ashwini,
I’m sorry, I don’t understand your question.
If you re-phrase it, I will give it another try!
Does the debt service cost include the interest costs for the future periods?
Hi Godfrey,
If you’re trying to determine if the Debt Service Coverage Ration will be met in a future period, then the answer to your question is yes.
In such a case, you’d compute the amount of interest expense for that period and include it in the computation.
On the other hand, if your computing a prior period, then the debt service costs would include the payments payable to the lender on the loan (both interest and principal) during the period in question. Usually, that period of time is one year.
All the best…
In calculating a rolling four quarter DSCR as in the following example
3/31/17 + 12/31/16 – 3/31/16, is the debt service amount for the quarter, just the amount paid for that prior quarter, or would it be the amount paid for the previous 12 months for that quarter.
Hi Mary,
If your lender requires your business to meet a rolling-four quarter DSCR loan covenant, then they would want you to include the total Debt Service payments for the rolling 12 months (or four quarters).
You’d add up the figures from all four quarters to compute the Debt Service Coverage Ratio. And it would be the actual debt service you are required to make during the specified four most-recent quarters, not the debt service you paid.
Hope that helps…