FinReady

DSCR: The Ratio That Decides If You Get Your Business Loan

DSCR. Four letters that will determine whether your loan gets approved or denied. If you're applying for any kind of business financing in Canada and you don't know your DSCR, stop what you're doing and read this.

What is DSCR?

Debt Service Coverage Ratio. It answers one question: can your business generate enough cash to pay its debts?

DSCR = Available Cash Flow / Annual Debt Service

How to calculate it

Available cash flow = Adjusted EBITDA minus income taxes. Annual debt service = all debt payments (principal + interest) for the year.

Example:

• Adjusted EBITDA: $200,000
• Income taxes: $25,000
• Available cash flow: $175,000
• Annual debt service: $120,000
• DSCR = $175,000 / $120,000 = 1.46x

What lenders want to see

• Above 1.50x: You're golden. Multiple banks will compete for your business.
• 1.20x to 1.50x: Acceptable. You'll get approved, possibly with conditions.
• 1.00x to 1.20x: Grey zone. Depends on the lender and your track record.
• Below 1.00x: You can't cover your debts. Automatic decline.

The projected DSCR trap

Here's where deals die. Your current DSCR might be 1.45x — great. But when the bank adds the new loan payment to your debt service, the projected DSCR drops to 1.05x. That's below their 1.20x threshold. Declined.

Always calculate your projected DSCR before applying. If it's tight, you have options: reduce the loan amount, extend the amortization period, increase your down payment, or show the bank a credible plan for revenue growth that will improve the ratio within 12 months.

Pro tip: different lenders, different thresholds

Traditional banks (RBC, TD, BMO, Scotiabank) typically want 1.20x minimum. BDC might accept 1.10x because they're mandated to take more risk. Credit unions sometimes fall in between. If you're at 1.15x, a traditional bank will decline but BDC might say yes. Know your options.