Debt Service Coverage Ratio: The Number Your Bank Is Going to Run Anyway

If you ever plan to borrow money for your shop, you need to understand DSCR.

DSCR stands for debt service coverage ratio.

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It sounds more complicated than it is. For most shop owners, the simple version is this:

EBITDA divided by annual debt service.

Annual debt service means the required principal and interest payments on your debt for the year.

A simple example

Say your shop generates $500,000 of EBITDA.

Your required principal and interest payments are $300,000 per year.

Your DSCR is 1.67.

That means the business generates $1.67 of EBITDA for every $1.00 of required debt payments.

Why banks care

Banks are not just asking whether your shop made money.

They are asking whether the business can safely support the debt.

Those are related questions, but they are not the same question.

A shop can be profitable and still have very little cushion after debt payments. That matters if sales dip, receivables stretch, parts are delayed, or a new location takes longer to ramp than expected.

What the number tells you

A 1.0 DSCR means the business is barely covering its required debt payments.

A 1.25 DSCR means there is some cushion.

A higher number usually gives the lender more comfort, although the exact threshold depends on the bank, the loan type, the borrower, and the risk in the deal.

The important part is not memorizing one perfect benchmark. The important part is knowing what your business can actually support.

When this matters

DSCR matters when you are buying equipment, refinancing debt, expanding a location, acquiring another shop, or asking the bank to support a larger growth plan.

It also matters before you get excited about an opportunity.

If the new debt pushes your coverage too tight, the deal may still be possible, but the margin for error gets smaller.

Know the number before the bank does

A lender is going to run this math.

As the owner, you should know it first.

Not because DSCR tells the whole story. It does not.

But it tells you whether the business has enough cushion to support the debt you are asking it to carry.

If you want to work through what your DSCR looks like before your next conversation with a lender, start by scheduling time with me.