What DSCR do lenders actually want?
The commonly seen range, why the same deal produces three different ratios depending on who calculates it, and what to do when yours lands just under the line.
Debt service cover ratio is the number most commercial credit decisions turn on. It divides the cash a business produces by everything it owes its lenders in a year, principal and interest, across every facility. At 1.0x the business earns exactly its repayments and nothing more. Nobody lends at 1.0x.
The question everyone asks is what number they need. The honest answer has two parts: the range commonly seen, and the reason the same deal produces different ratios depending on who is doing the arithmetic. The second part matters more.
The range you will commonly see
| DSCR | How it usually reads |
|---|---|
| Below 1.0x | The business does not cover its repayments from trading. Something else is paying them. |
| 1.0x to 1.24x | Covered, with almost no room. Rarely enough on its own for an unsecured or goodwill-heavy facility. |
| 1.25x to 1.49x | The band most commercial facilities are written in, particularly with property security. |
| 1.5x and above | Comfortable. Common where the lending is against goodwill, or the earnings are volatile. |
Levels commonly seen across commercial lending. Not any lender's stated policy, and every file turns on its own facts.
Property security tends to pull the required cover down, because the lender has something to sell. Goodwill-heavy acquisitions, short trading histories and concentrated customer bases tend to push it up. A business acquisition with no property behind it is usually being tested nearer the top of that table than the bottom.
Why the same deal produces three different ratios
Here is the part that surprises people. Three parties can look at one business and produce three different DSCRs, all correctly calculated, because they are using different inputs.
| Who is calculating | Earnings used | Rate used | DSCR |
|---|---|---|---|
| The vendor's adjusted figure, at the quoted rate | $420,000 | 7.0% | 3.01x |
| Owner salary put back, at the quoted rate | $300,000 | 7.0% | 2.15x |
| Owner salary put back, at an assessment rate | $300,000 | 10.0% | 1.89x |
$1,000,000 facility over ten years, fully amortising. Illustrative, and the pattern is representative of real files.
The deal is the same in all three rows. What changed is whose earnings figure and whose rate. The first row is the number on the broker's advertisement. The third is the number the credit team will run. If you are planning against the first one, you are planning against a ratio nobody will ever assess you on.
The gap between row one and row three is not a trick. It is the two adjustments a lender makes as standard: a market salary for the work the owner actually does, and a rate above the one you were quoted.
What to do when you land just under
A ratio slightly below the line is the most common place a good deal stalls, and there are usually four levers before anyone concludes the deal does not work.
- Lengthen the term. The single most effective lever on cover, because it lowers the annual principal without touching the earnings.
- Reduce the facility. Often a modest increase in deposit moves cover more than months of trading improvement would.
- Restructure existing commitments. Consolidating short-dated equipment finance into a longer facility frees annual cash immediately.
- Evidence the earnings properly. Where add-backs are real but undocumented, the ratio was always higher; nobody had proved it.
That last one is worth dwelling on. A large share of the files we see are not short of earnings. They are short of evidence for earnings that genuinely exist, and a credit team cannot adopt a figure it cannot trace.
The number to actually watch
DSCR on its own tells you whether you pass today. Covenant headroom tells you how much room you have before you stop passing, and it is the more useful number to run a business against. At 1.5x cover, earnings can fall by a third before the covenant breaches. At 1.25x, they can fall by a fifth. Same deal, very different amount of bad news it can absorb.
General information only. It does not take your objectives, financial situation or needs into account, and it is not credit, tax or financial product advice. Figures are illustrative. Finance is arranged through The Lending Lab Pty Ltd (ACN 651 936 337), Credit Representative 538291. Nicholas Clunes is Credit Representative 530711. Both are authorised under Australian Credit Licence 387856.
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