Business Loan DSCR Calculator

What this calculator answers

Two questions to settle before applying for a business or commercial real estate loan: does your cash flow cover the loan payments with room to spare, and how much could you borrow before coverage falls below the lender’s target? The first is the debt service coverage ratio (DSCR). This calculator adds a proposed loan’s payments to the debts you already pay, shows coverage for each and for all of them together, and turns a target DSCR into a maximum payment and loan amount. A third setting handles the rent ÷ PITIA ratio that some lenders use for investor “DSCR loans” on rentals.

How to use it

• Find: DSCR for a loan tests a loan amount you have in mind; Maximum loan works back from your target.
• Cash flow measure: business cash flow (EBITDA or a similar figure), property net operating income (NOI), or the rental DSCR-loan method. The first two use the same math; the name follows through the results and copied text.
• Annual cash flow: one year of cash flow before any loan payments, in dollars. It can be negative (the ± button types the minus sign on a phone).
• Existing debt payments: each payment on loans and leases that stay in place, monthly, quarterly or yearly. The line under the field shows the yearly total. Leave it blank if there are none, and leave out any loan the new one will pay off.
• Monthly rent, property tax, insurance and HOA dues replace those two fields for the rental method.
• Loan amount and annual interest rate: the note rate from the term sheet, not the APR. A loan amount of 0 checks existing debt alone.
• Amortization period: the schedule the payment is based on, such as 10, 25 years or 300 months. It can be longer than the loan term.
• Payment frequency: monthly unless your loan says otherwise.
• Loan term (optional): when it is shorter than the amortization, a balloon is due at the end, and the calculator shows it.
• Target DSCR: the lender’s minimum, as a ratio. The example’s 1.25 is an example, not a rule.

Results update as you type. The Try buttons find the largest loan at a 1.25 DSCR, test a $225,000 duplex loan from its NOI and from rent ÷ PITIA, and set up a $1,000,000 loan with a 5-year balloon. The What if tabs repeat the calculation for other cash flows, rates, amortization periods and targets. To weigh two loan offers, press Save for comparison, change the inputs and save again. Continue in the Loan Payment Calculator carries the loan across for its full payment schedule.

How to calculate DSCR

Divide the cash flow available for debt service by the debt service due over the same period, usually a year:

$$\text{DSCR} = \frac{\text{cash flow available for debt service}}{\text{annual debt service}}$$

Annual debt service is every scheduled payment of principal and interest in the year, on existing debt and the new loan. A new loan’s level payment comes from the loan amount $P$, the rate per payment $i$ (the annual rate ÷ payments a year) and the number of payments $n$ (years × payments a year):

$$M = P \times \frac{i}{1 - (1 + i)^{-n}} \qquad \text{annual debt service} = M \times \text{payments a year}$$

At 1.00, cash flow exactly covers the payments. At 1.25 it covers them one and a quarter times, so a fifth of the cash flow ($0.25 \div 1.25$) is left after the payments.

What counts as cash flow: NOI, EBITDA and lender add-backs

• NOI, for income property, is a year of rents and other income minus operating expenses. Operating expenses leave out interest, principal, income taxes and depreciation. In the OCC’s definition they include a reserve for replacing capital items such as roofs and heating systems, whether or not the owner actually sets the money aside.
• EBITDA, for an operating business, is earnings before interest, taxes, depreciation and amortization. Interest is added back because it is part of the debt service on the other side of the ratio.
• The lender’s own figure. Each lender defines the income and expenses it counts, and the OCC notes that a DSCR written into loan covenants can be defined differently from the one used to approve the loan. A bank may also look at the combined (“global”) cash flow of the business and its owners or guarantors. Ask for the lender’s definition and enter the figure it gives.

What counts as debt service (existing and new loans)

Every scheduled payment on debt that will still be in place after the new loan: term loans, equipment and vehicle loans, and mortgages on business property. Leave out debt the new loan refinances, or it is counted twice. The Coverage by debt table shows the ratio for existing debt alone, the new loan alone and both together. Both together is the figure that says whether cash flow can carry the new loan.

Worked example: $400,000 at 9.25% on $100,000 of EBITDA

A company with $100,000 of EBITDA a year already pays $1,850 a month on an equipment loan. It wants to borrow $400,000 at 9.25%, amortized over 10 years with monthly payments, and its lender’s target is 1.25 (an example).

1. Existing debt service: $1,850 × 12 = $22,200.00 a year.
2. Rate per payment and number of payments: i = 0.0925 ÷ 12 = 0.00770833, and n = 10 × 12 = 120.
3. New payment: M = $400,000 × 0.00770833 ÷ (1 − 1.00770833^−120) = $5,121.31 a month.
4. New debt service: $5,121.31 × 12 = $61,455.72 a year.
5. Total debt service: $22,200.00 + $61,455.72 = $83,655.72 a year.
6. DSCR = $100,000 ÷ $83,655.72 = 1.1954, which rounds to 1.20.

Cash flow covers the payments 1.20 times and leaves $16,344.28 a year. On its own, the existing loan is covered 4.50 times and the new loan 1.63 times. That misses the 1.25 target: reaching it takes cash flow of 1.25 × $83,655.72 = $104,569.65, 4.6% more than today, or a smaller loan. In a spreadsheet, =PMT(9.25%/12, 120, -400000) gives the same payment.

How much can I borrow at a target DSCR?

Work backward from the target: the most debt service cash flow supports, minus the debt you already pay, turned into a loan amount. For the same company at 1.25:

1. Most total debt service: $100,000 ÷ 1.25 = $80,000.00 a year.
2. Room for the new loan: $80,000.00 − $22,200.00 = $57,800.00 a year.
3. Maximum payment: $57,800.00 ÷ 12 = $4,816.666…, rounded down to $4,816.66 so it stays within the limit.
4. Maximum loan, the present value of 120 of those payments: $4,816.66 × (1 − 1.00770833^−120) ÷ 0.00770833 = $376,205.38, also rounded down.

That is $23,794.62 less than the company asked for. The spreadsheet equivalent is =PV(9.25%/12, 120, -4816.66). The target, the rate and the amortization all move the answer:

If existing debt already uses the room, no new loan fits. With existing payments of $7,000 a month ($84,000 a year) against the $80,000.00 limit, the maximum is $0, and cash flow would have to exceed 1.25 × $84,000 = $105,000 before any new loan fits.

What DSCR do lenders look for?

There is no single number. Banks set minimum coverage in their own lending policies, and the level can differ by type of loan and property. The OCC’s Comptroller’s Handbook says the right DSCR depends on the amortization period and how volatile the cash flow is: a lower ratio can be reasonable with a shorter amortization or long leases to strong tenants, while uneven income, such as a hotel’s, may call for a higher one. For SBA 7(a) and 504 loans, SBA publishes its origination rules in SOP 50 10. Enter your lender’s target; this page doesn’t treat any value as standard.

What a DSCR below 1.0 means

Below 1.00, the year’s payments are more than the cash flow, and the gap has to come from other money, such as the owners’ savings. At exactly 1.00 nothing is left over. A cash flow of zero or less gives a DSCR at or below 0, which the calculator shows as a named result rather than an error, and with no debt at all there is nothing to divide by, so it says “No debt service” instead.

The Cash flow tab shows how quickly coverage slips. If the example company’s cash flow fell 30%, to $70,000, its DSCR would be 0.84 and the payments would exceed cash flow by $13,655.72 a year. It can lose 16.3% before coverage reaches 1.00.

Amortization vs. loan term: when a balloon is due

The amortization sets the payment; the term sets when the loan is due. When the term is shorter, the unpaid balance is due in one sum at the end, a balloon payment. The OCC handbook’s example is a $1 million loan at 6% amortized over 25 years with a 5-year term: payments of about $6,443 a month and about $899,000 owed at maturity. The $1M Try button gives $6,443.01 a month and a balloon of $899,321.11, with interest rounded to the cent each month. With $100,000 of NOI, that loan’s DSCR is 1.29.

The balloon isn’t part of a year’s debt service, so it doesn’t change the DSCR, but it has to be repaid or refinanced when the term ends. For interest-only loans, the OCC expects banks to test coverage as though the loan were amortizing, which is why this calculator always uses the amortizing payment.

Business DSCR vs. rental “DSCR loans”

Some mortgage lenders’ investor “DSCR loans” for rentals use a simpler ratio: gross monthly rent divided by PITIA (principal, interest, taxes, insurance and association dues). It takes nothing off for vacancy, repairs or management, so the same property can score very differently. The duplex from the rental property cash flow guide has NOI of $17,992.80 against $17,512.20 a year of payments on a $225,000 loan at 6.75%, a DSCR of 1.03. On the rent method, $2,800 ÷ ($1,459.35 + $300.00 + $150.00) = $2,800 ÷ $1,909.35 = 1.47. The two duplex Try buttons show both; ask which formula a quote uses and choose it under Cash flow measure.

On NOI, that duplex supports at most $192,646.26 at a 1.20 target: $17,992.80 ÷ 1.20 = $14,994.00 a year, or $1,249.50 a month.

How to improve DSCR

The ratio has two sides, so there are two kinds of change, and each has a cost:

• More cash flow: higher revenue or lower operating costs.
• Less debt service: borrow less, get a lower rate, or stretch the amortization. At 15 years instead of 10, the example’s payment falls to $4,116.77 and its DSCR rises to 1.40, but interest over the life of the loan grows from $214,556.93 to $341,018.33.
• Pay off or refinance existing debt: without the $22,200 a year of equipment payments, the example’s DSCR would be $100,000 ÷ $61,455.72 = 1.63.

The What if tabs show each lever for your own numbers, and Highest rate tells you how far the rate could go before the loan misses your target: 7.82% for the example loan, below its 9.25% rate.

Reading the result

• The headline is the DSCR, with what it means in dollars. In Maximum loan mode it is the largest loan at your target.
• The note under it says whether you meet your target, how far cash flow could fall before coverage drops to the target and to 1.00, or what it would take to get there. If a rounded ratio sits on your target (1.2496 shows as 1.25), it says which side you are on.
• The tiles give the payment, total debt service, what is left, the maximum loan at your target, the cash flow the loan needs, and the highest rate at which this loan meets the target.
• Where each year’s cash flow goes splits cash flow into existing debt, the new loan and what is left.
• How this was calculated shows each formula with your numbers, and the spreadsheet functions that give the same answers.
• Coverage by debt (with existing debt) and the What if tables download as CSV files.

Assumptions and limitations

• It is an estimate, not a financing offer or credit decision. Lenders decide which cash flow counts, which debts they include and what coverage they require.
• The new loan has a fixed rate and level payments. A variable rate changes the payment; the Rate tab shows how much.
• Payments are rounded to the cent, and a year of debt service is the payment times the payments a year. Existing debt payments stay the same all year.
• Cash flow is the single year you enter. Nothing is averaged, projected or adjusted for taxes.
• No fees, interest-only periods or prepayments are modeled, and the balloon is not part of a year’s debt service.

Common mistakes

• A month of cash flow against a year of payments. Annual cash flow means a year. The calculator warns when the DSCR is under 0.25 and twelve times the cash flow would cover the payments.
• Starting from net income. Net income is after interest and taxes; using it counts the interest twice, once inside the income and again in the debt service.
• Forgetting existing debt. The new loan alone may be well covered while the business as a whole is not: 1.63 versus 1.20 in the example.
• Entering the loan term as the amortization. For the $1 million loan, amortizing over the 5-year term instead of 25 years gives a payment of $19,332.80 and a DSCR of 0.43 instead of 1.29.
• Comparing a rent ÷ PITIA ratio with an NOI-based DSCR. For the duplex it’s 1.47 against 1.03 for the same property.
• Typing the target as a percentage. Enter 1.25, not 125.