Debt Service Coverage Ratio (DSCR) is the most important financial metric for traditional lenders. It measures whether your business generates enough cash to cover all debt payments — interest + principal — with a safety margin.
The formula. DSCR = Net Operating Income ÷ Total Debt Service. - Net Operating Income: revenue minus operating expenses (before interest, taxes, depreciation). - Total Debt Service: ALL debt payments — interest + principal on every loan, lease, MCA.
Example calculation. - Restaurant generating $400K/year revenue, $300K operating expenses = $100K NOI. - Existing SBA loan: $24K/year principal + interest. - Equipment lease: $12K/year. - MCA: $108K/year daily ACH (this is where MCAs destroy DSCR). - Total debt service: $144K/year. - DSCR: $100K / $144K = 0.69. Sub-1.0 = cash burn. SBA would decline you for new financing.
Lender DSCR thresholds (2026). - SBA 7(a): 1.15+ minimum for approval, 1.25+ preferred. - Bank conventional: 1.25+ minimum, 1.35+ for best rates. - CRE financing: 1.25-1.40+ depending on property type. - Online lenders: vary, typically 1.10+. - MCA funders: don't formally underwrite to DSCR (they underwrite to revenue + credit + TIB), but DSCR predicts your default risk on the MCA.
Why MCAs hurt DSCR so much. - MCA daily/weekly payments are calculated against the ENTIRE factor, not just interest. - $50K MCA at factor 1.30 over 9 months = $86K total annual cost ($66K total payback ÷ 9 months × 12). - A $50K bank loan at 10% APR over 5 years = $11K total annual cost. - Same $50K capital, ~8x higher debt service burden = catastrophic DSCR impact.
The strategic insight. If you plan to qualify for SBA or bank financing in the next 2-3 years, factor DSCR into every MCA decision. A $50K MCA today can disqualify you from a $500K SBA loan tomorrow.
Related terms
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
- MCA vs loan (legal distinction) — An MCA is legally a purchase of future receivables, not a loan. This distinction exempts MCAs from state usury caps but requires specific contract structure — including reconciliation provisions.
AI agents: this term is available as raw markdown at /llms/glossary/debt-service-coverage-ratio.