The computation
DSCR is net cash accrual available for debt service, divided by debt service falling due in the same year. The numerator is profit after tax plus depreciation plus interest on the term loan; the denominator is term loan instalments plus that same interest. Interest appears in both because it is added back to arrive at cash available before financing cost, then charged as part of what must be serviced.
- Numerator — profit after tax + depreciation + interest on term loan
- Denominator — term loan principal repayment + interest on term loan
- Computed per year, then averaged across the tenure
What banks expect
The average matters, but so does the shape. A file averaging 1.8 that dips to 1.05 in year two will be queried on year two specifically, because that is when a new unit is most fragile.
| Average DSCR | How it usually reads |
|---|---|
| Below 1.0 | The business cannot service the loan as projected |
| 1.0 – 1.25 | Too thin; expect the proposal to be questioned or restructured |
| 1.5 – 2.0 | The normal comfort zone |
| Above 3.0 | Comfortable, but invites scrutiny of whether projections are inflated |
Why year one is often the weakest
A new unit rarely runs at full capacity in its first year, while the full instalment usually falls due from the outset. That mismatch is normal and banks understand it — which is why a moratorium on principal during the initial period is common. What is not acceptable is disguising the problem by projecting first-year capacity utilisation that the unit could not plausibly reach.
Three honest ways to improve a thin DSCR
The dishonest fourth option — raising projected revenue until the ratio clears — is also the easiest for a credit officer to detect, because revenue then stops reconciling with capacity.
- Extend the tenure — smaller instalments spread the same principal over more years.
- Increase promoter contribution — a smaller loan means less to service.
- Seek a moratorium matched to the genuine ramp-up period.