Why debt service coverage ratio (DSCR) matters to a first-time founder
Lenders use DSCR to judge repayment capacity and may set a minimum ratio in a loan covenant, which is a contractual promise. A weak ratio can restrict borrowing or trigger discussions with the lender. Founders need the lender’s exact formula because definitions of available cash and debt service vary between agreements.
Examples of debt service coverage ratio (DSCR)
A business has £240,000 of cash available for debt service and £200,000 of principal and interest due this year. Its DSCR is 1.2, calculated as £240,000 divided by £200,000. A 15% fall in available cash would reduce it to 1.02, leaving almost no cushion for weaker trading.
Common misunderstanding
DSCR is not the same as the interest coverage ratio, which generally compares earnings with interest and excludes principal repayments. A ratio above 1 suggests coverage under the chosen formula, but it does not guarantee payment. Timing, restricted cash, seasonal needs and unexpected costs can still cause a shortfall.
When to use it
Calculate it before taking debt, preparing lender forecasts or testing covenant compliance. Use the formula and accounting definitions in the actual agreement, then stress-test revenue and costs. If a breach looks likely, speak to the lender early. Do not manipulate classifications or forecasts to conceal non-compliance; that can be fraudulent.