DSCR (Debt Service Coverage Ratio)

Definition

Cash available for debt payments divided by the payments themselves.

Why It Matters

It is the test that turns an asking price into financeable or not, because a lender sizes the loan to hold coverage above its line, commonly 1.25x after a market owner salary. Run it before you fall for a deal: if the price only clears the ratio by underpaying yourself, the business cannot actually carry the debt you would be signing for.

In numbers: A business producing $600k of cash flow against $400k of annual debt payments has a DSCR of 1.5x; at $500k of debt payments it drops to 1.2x, under the 1.25x line many lenders want.