Quick answer
The debt service coverage ratio (DSCR) compares the cash a business earns with the loan repayments it has to make. Divide annual earnings before interest, tax, depreciation and amortisation by total yearly principal and interest repayments. A result of 1.0 means earnings only just cover repayments. Most Australian lenders want a clear margin above that before they approve new debt.
Key points
- DSCR = yearly earnings available for debt ÷ yearly principal and interest repayments
- Every finance commitment counts, including equipment leases and an ATO payment plan
- Lenders often deduct owner drawings or tax first, so their figure is usually lower than yours
- A thin ratio can sometimes be offset by property security, a longer term or a smaller loan
Put simply, the debt service coverage ratio answers one question: for every dollar your business must pay its lenders this year, how many dollars does it earn? A lender sees a figure of 1.6 as “earnings cover the repayments one and a half times over, with room to spare”. A figure of 0.9 means the business is short, and something else, usually the owner, is filling the gap.
It’s the most common way Australian lenders test serviceability, the ability to keep up repayments from trading rather than from selling assets.
How is DSCR calculated?
The top line is the cash the business generates before it pays any lender. Most credit teams start with EBITDA (net profit with interest, tax, depreciation and amortisation added back) and then adjust it with accepted add-backs, such as a one-off legal bill.
The bottom line is every regular finance commitment for a year, principal and interest together. That includes the proposed new loan.
| Piece | What usually goes in |
|---|---|
| Earnings | EBITDA from the latest tax return or year-to-date management accounts, plus evidenced add-backs |
| Deductions some lenders make | Owner drawings or a living allowance, income tax, any rent the owner won’t keep paying |
| Repayments | Term loans, equipment finance, leases, overdraft interest, ATO payment plan instalments, the new facility |
Two small details trip people up. A balloon payment at the end of an equipment loan isn’t usually counted in the yearly figure, but an interest-only facility is often assessed as if it were already paying principal. Ask the lender how it treats both.
Why does my figure differ from the lender’s?
Because the lender is trying to measure cash that’s genuinely free. The biggest gap usually comes from the owner’s pay. A company that pays its director a wage already has that cost in the profit. A sole trader or partnership doesn’t, so a lender subtracts a living allowance before running the ratio, and the result can fall sharply.
The second gap is timing. If the business has grown, last year’s tax return will understate it. Up-to-date management accounts signed off by your accountant, together with the lodged BAS for the same months, give a lender a reason to use the newer, stronger figure.
A worked example: a regional engineering workshop
Picture a fabrication workshop in Ballarat run as a partnership. Its accounts show EBITDA of $260,000. It already repays $95,000 a year on a truck and a CNC machine, and wants a new equipment loan costing $60,000 a year.
- Owner’s version: $260,000 ÷ ($95,000 + $60,000) = 1.68
- Lender’s version, after a $90,000 living allowance for the two partners: $170,000 ÷ $155,000 = 1.10
The same business has gone from comfortable to tight. A few levers are open to the partners: pay out the smaller lease first, stretch the new loan over a longer term to shrink the yearly repayment, or show that the new machine replaces a subcontractor they currently pay. You can test variations quickly in our DSCR calculator, then carry the result into the business borrowing power calculator.
Not sure where your figure will land with a lender? Send us the numbers and a specialist will tell you who works with ratios like yours.
Where else does DSCR show up?
Larger bank facilities often turn the ratio into a loan covenant: the business must keep its DSCR above an agreed level, tested each year from its accounts. Falling below it can be a breach even when every repayment has been made on time.
Banks are often the cheapest money around, and a business with a strong ratio and current accounts should start there. If yours is thinner than a bank likes, a property-secured lender may lean more on equity than on the ratio, and a bank offer that comes in lower than you asked for is often the ratio at work.
Is your ratio telling you something?
A tight DSCR doesn’t mean no; it changes which lender is likely to say yes and how the loan should be shaped. Tell us your earnings, your current repayments and what you’re trying to fund. Sixty seconds of typing is all it needs, and no credit file gets pulled for an enquiry. We don’t forward your numbers to a long list of funders; a specialist who works with serviceability every day looks at them personally and rings you. Honest earnings and repayment figures let us point you to a lender that fits on the first call.
Frequently asked questions
What DSCR do Australian lenders look for?
There's no single number. Banks generally want a comfortable buffer above 1.0, often somewhere around 1.25 to 1.5 depending on the loan and industry. Non-bank and property-secured lenders may accept less when the security or the business's track record makes up for it.
Is DSCR the same as interest cover?
No. Interest cover only compares earnings with interest. DSCR also includes the principal portion of every repayment, so it's the stricter test and the one most lenders use for term loans and equipment finance.
Does a sole trader's DSCR include their own wage?
It should. A sole trader or partnership pays the owner through drawings rather than wages, so the profit shown hasn't yet paid anyone to run the business. Most lenders take out a reasonable living allowance before working out the ratio.
Which repayments go into the bottom line?
All of them: business loans, chattel mortgages, hire purchase, finance leases, overdraft interest, merchant cash advance remittances and any ATO payment arrangement. Leave one out and the lender's check of your bank statements will find it.
How can I improve my DSCR before applying?
Refinance short, expensive debt onto a longer term, pay out small leases, ask for a smaller amount, or wait for a stronger set of accounts. Clearing personal costs that run through the business also lifts the earnings figure.