Frequently Asked Questions(FAQ)

What is a good Debt Service Coverage Ratio?

While there is no industry standard when it comes to the Debt Service Coverage Ratio, most lenders use the cut-off of 1.2 to 1.25 to evaluate the borrower’s creditworthiness. This means that DSCR above 1.2 is generally considered “good.”

Is higher DSCR better?

Yes, the higher DSCR, the better. In general, DSCR above 1 means that a company is able to cover its debt obligations with its cash flow.

Can DSCR be negative?

Yes, DSCR can be negative if the company experiences large net losses and does not generate enough cash flow to repay its debt obligations.

How do banks use the Debt Service Coverage Ratio?

Banks and other lenders use the Debt Service Coverage Ratio to evaluate the company’s ability to repay its debt obligations, including principal and interest payments, with cash flow generated from its operations. This and other financial health metrics are then analyzed to make a decision of whether to approve the loan application and how much to lend.

About the Authors

Tetiana Sitiugina-Babiuk

Written by: Tetiana Sitiugina-Babiuk

Financial Sector Specialist and Content Strategist

Independent writer, content strategist, and financial sector specialist. Tatiana has an extensive experience in working with financial institutions such as Bank of Canada and Risk Management unit at FinDev Canada. She holds an MA in Financial Risk Management from the University of Toronto.

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