Debt service coverage ratio (DSCR)
Last updated
Quick Answer
Debt service coverage ratio measures cash available for debt service against required debt service over a period.1,2
What it is
It is a coverage test rather than a leverage test, which makes it the binding constraint in acquisition lending at the lower end of the market — SBA-backed change-of-ownership lending in particular is underwritten on coverage. A maximum price derived from a coverage requirement can differ sharply from one derived from a comparable multiple.1,2
Operational context
What good looks like
Why It Matters
A buyer who models a purchase price off a market multiple and then discovers the lender sizes on coverage has not found a financing problem; it has found that its bid was never financeable.1
Term Family
Related concepts
Frequently Asked Questions
What is Debt service coverage ratio (DSCR) in venture capital?
It is a coverage test rather than a leverage test, which makes it the binding constraint in acquisition lending at the lower end of the market — SBA-backed change-of-ownership lending in particular is underwritten on coverage.
Why is Debt service coverage ratio (DSCR) important for startups?
Understanding Debt service coverage ratio (DSCR) is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.T1-13 — US Small Business AdministrationSBA SOP 50 10 8 (effective June 1, 2025) — 7(a) change-of-ownership rulesUS Small Business Administration(Debt service coverage ratio measures cash available for debt service against required debt service over a period.)primary · T1 · debt-capital-structure · metric
- 2.T3-11 — Starfield & SmithBest Practices: A Review of Equity Injection Requirements Under SOP 50 10 8 (May 2025)Starfield & Smith(Debt service coverage ratio measures cash available for debt service against required debt service over a period.)secondary · T3 · debt-capital-structure · metric
- 3.T4-02 — GF Data (an ACG company)GF Data — M&A and leverage reportsGF Data (an ACG company)(Debt service coverage ratio measures cash available for debt service against required debt service over a period.)orientation · T4 · debt-capital-structure · metric
Newsletter
BankingBeast Brief
Deal execution, credit terms, and closing mechanics. Every Tuesday.
BankingBeast Brief
The weekly brief on deal execution
Weekly analysis of capital markets execution, syndication, and transaction diligence. Every Tuesday, free.
Archstone
Run your fund like an institution.