{"id":208382,"date":"2025-02-21T09:10:53","date_gmt":"2025-02-21T17:10:53","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=208382"},"modified":"2025-02-12T16:11:55","modified_gmt":"2025-02-13T00:11:55","slug":"how-debt-service-coverage-ratios-apply-to-loans","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/how-debt-service-coverage-ratios-apply-to-loans\/","title":{"rendered":"How Debt Service Coverage Ratios Apply to Loans"},"content":{"rendered":"<p><span data-contrast=\"auto\">Your debt service coverage ratio is a calculation that shows the percentage of cash available to make loan payments after subtracting other expenses, and it is used by lenders to determine how risky your business is to lend to.\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">A ratio of 1 means that your business has the exact amount of capital required to make payments on a <\/span><a href=\"https:\/\/www.nationalfunding.com\/small-business-loans\/\"><span data-contrast=\"none\">small business loan<\/span><\/a><span data-contrast=\"auto\">, while anything below 1 means you can\u2019t afford the debt. The higher the number, the better your cash flow. A higher figure builds lender confidence, because it shows you can weather a revenue decline or increased expenses and still be able to repay the loan.\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">A ratio of 1 doesn\u2019t leave any safety net in case sales decline or expenses increase, which is why most lenders require a debt service coverage ratio of between 1.25 and 1.5. If you don\u2019t have good credit, they might require a ratio of 2 or more.\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">By calculating the ratio yourself, you can see where your business is currently at. Plus, you can use some of the tips below to help adjust the ratio in your favor or to show why you\u2019re not a high-risk borrower when you apply for a business loan.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"2\"><span data-contrast=\"auto\">How to calculate your debt service coverage ratio<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:360,&quot;335559739&quot;:120}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">There are three steps to calculate your debt service coverage ratio:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ol>\n<li data-leveltext=\"%1.\" data-font=\"\" data-listid=\"1\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Add together these lines from your most recent annual income statement (some might be $0 for your business).\u00a0<\/span><\/li>\n<\/ol>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:1440,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Net income<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:1440,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Interest expense<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:1440,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Tax expense<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:1440,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">Depreciation expense<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:1440,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"5\" data-aria-level=\"1\"><span data-contrast=\"auto\">Amortization expense\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">The sum of these numbers is EBITDA (earnings before interest, taxes, depreciation, and amortization). Divide this by 12 to get monthly EBITDA.<\/span><br \/>\n<span data-ccp-props=\"{&quot;335559685&quot;:720}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">2. Figure out your monthly loan payments (principal and interest) with an online loan payment calculator or by asking your lender if you\u2019re already working with one. <\/span><\/p>\n<p><span data-contrast=\"auto\">3. Divide monthly EBITDA by the monthly loan payment to get your debt service coverage ratio.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"2\"><span data-contrast=\"auto\">Ways to improve your debt service coverage ratio<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:360,&quot;335559739&quot;:120}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">To improve your debt service coverage ratio, you can either increase EBITDA or decrease the required monthly loan payments. Lowering monthly payments is something you can do immediately by shopping around for a lower interest rate or extending the repayment term of the loan.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">If you can\u2019t find a lower rate at first, you could offer your lender additional collateral to offset the lender\u2019s risk in exchange for a lower interest rate.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">A longer loan repayment period can lower monthly payments even if it comes with a higher interest rate. This frees up cash flow for the new loan, operating expenses, or growth strategies.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Improving EBITDA can take time since you have to increase revenue or lower your business\u2019s expense structure. You can begin improving EBITDA revenue by:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Finding new customers<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Entering new markets<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Raising prices<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">If you don\u2019t have near-term options to grow sales, you can lower expenses by renegotiating costs with vendors or eliminating business travel and entertainment costs from your chart of accounts.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">A final option and last resort to improve your debt service coverage ratio is to reduce your workforce. While this may not be ideal, it might be the best decision for a more efficient business, especially if you\u2019re applying for <\/span><a href=\"https:\/\/www.nationalfunding.com\/equipment-leasing\/\"><span data-contrast=\"none\">equipment financing<\/span><\/a><span data-contrast=\"auto\"> to modernize a factory with new machines, thus requiring fewer workers anyway.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">If you\u2019re in the growth phase, your debt service coverage ratio may not be in great shape because of the current higher costs. This isn\u2019t uncommon. In these situations, you may be able to leverage your proven track record as a business owner, along with paperwork showing your previous ratios, when applying for financing.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"2\"><span data-contrast=\"auto\">How to negotiate a different debt service coverage ratio requirement<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:360,&quot;335559739&quot;:120}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">You may be able to negotiate a different debt service coverage ratio requirement by offering additional collateral to the lender, thus lowering their risk on the loan.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Showing the lender how your ratio has improved over time can also help the lender feel more comfortable, as it shows that you\u2019ve managed the business well in the past and will likely continue to do so. The same recommendation applies if you\u2019re in the growth phase and your debt service coverage ratio isn\u2019t as strong as it once was. Showing proof of previous performance can build lender confidence.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Use your last 3 or 4 annual income statements and show how your debt service coverage ratio has grown each year, or what it was prior to expanding your business. Now combine this with sales forecasts to show the lender how the loan will help you increase revenue and improve your ratio in the future.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Don\u2019t worry if your debt service coverage ratio isn\u2019t perfect. While it\u2019s one of a few <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/debt-ratios-and-why-they-matter-to-small-businesses\/\"><span data-contrast=\"none\">debt ratios that matter<\/span><\/a><span data-contrast=\"auto\"> to small business lenders, there are steps you can take to improve it, including by growing sales or decreasing expenses. Additionally, you can negotiate for a lower ratio requirement by offering collateral or finding other ways to reduce a lender\u2019s risk.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Your debt service coverage ratio is a calculation that shows the percentage of cash available to make loan payments after subtracting other expenses, and it is used by lenders to determine how risky your business is to lend to.\u00a0\u00a0 A ratio of 1 means that your business has the exact amount of capital required to<a class=\"excerpt-read-more\" href=\"https:\/\/www.nationalfunding.com\/blog\/how-debt-service-coverage-ratios-apply-to-loans\/\" title=\"ReadHow Debt Service Coverage Ratios Apply to Loans\">&#8230; Read more &raquo;<\/a><\/p>\n","protected":false},"author":38,"featured_media":208383,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-208382","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-lending"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How Debt Service Coverage Ratios Apply to Loans - National Funding<\/title>\n<meta name=\"description\" content=\"Your debt service coverage ratio is a way to show lenders you can cover monthly payments and get the funding you need. 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