What is DSCR?
The Debt Service Coverage Ratio measures whether your business generates enough operating income to cover its debt repayments. A DSCR of 1.25 means you generate £1.25 of operating income for every £1.00 of debt service. Below 1.0 means your business cannot cover its debt from operations, and most lenders will not approve a loan in this situation.
What DSCR do lenders require?
Most UK high street banks and institutional lenders require a minimum DSCR of 1.25 after the proposed loan. Some alternative lenders will accept 1.1 for short-term facilities. Government backed schemes such as the Recovery Loan Scheme may have more flexible criteria. A DSCR above 1.5 is considered strong and will typically unlock better rates.
How can I improve my DSCR?
You can improve your DSCR by increasing revenue or gross margin, reducing operating expenses, paying down existing debt before taking new borrowing, or extending the term of proposed debt to reduce annual repayments. A longer loan term reduces annual debt service but increases total interest paid.