# Debt service coverage ratio (DSCR)

> Debt Service Coverage Ratio (DSCR) measures a business's ability to cover debt payments from operating income. Calculated as Net Operating Income ÷ Total Debt Service. SBA requires 1.15+ minimum; banks typically 1.25+. MCAs don't formally underwrite to DSCR but it predicts default risk.

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)](https://fundnode.co/llms/glossary/merchant-cash-advance) — 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)](https://fundnode.co/llms/glossary/mca-vs-loan) — 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.

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Source: https://fundnode.co/glossary/debt-service-coverage-ratio (HTML version)
Document: Debt service coverage ratio (DSCR) — Fundnode MCA Glossary
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