Ironport Capital Group, a small-business funding service in Logan, Utah, explains how a Cache County company calculates its debt service coverage ratio: cash available for debt payments divided by the debt payments due. This article works the ratio from invented financial statements, shows the EBITDA version, and explains why partners compare it but do not publish a single cutoff.
What the ratio measures
A debt service coverage ratio, or DSCR, asks one question: for every dollar of loan payments the business owes in a year, how many dollars does it earn to pay them with? A ratio of 1.0 means income exactly covers payments. Above 1.0 leaves a cushion; below 1.0 means the business is short.
Partners reviewing a term loan for an expansion or a practice purchase usually calculate it twice: once on today's debts, and again with the new payment added.
How to calculate the debt service coverage ratio for a company
The basic formula:
- Start with net operating income: revenue minus operating expenses, before interest and taxes.
- Add back non-cash expenses such as depreciation and amortization.
- Total the year's debt service: all principal and interest payments on loans, equipment financing and leases treated as debt.
- Divide the first figure by the second.
Partners vary in what they add back and what they count as debt service, which is one reason two partners can reach different ratios from the same statements.
How to calculate the debt service coverage ratio from financial statements
Illustration only, with invented figures. A Logan, UT HVAC company's income statement shows revenue of $1,200,000 and operating expenses of $1,010,000, giving operating income of $190,000. Depreciation on its vans and tools was $45,000, so cash available for debt service is $235,000.
Its existing debt service is $96,000 a year: $62,000 on van and equipment financing and $34,000 on a term loan. The ratio is $235,000 divided by $96,000, about 2.45.
Now add the proposed loan. A new term loan would add $48,000 a year in payments, bringing debt service to $144,000. The ratio becomes $235,000 divided by $144,000, about 1.63. That second number is the one a partner focuses on.
How to calculate the debt service coverage ratio using EBITDA
Many partners start from EBITDA: earnings before interest, taxes, depreciation and amortization. In the example, EBITDA is the same $235,000, because operating income plus depreciation equals EBITDA when there is no amortization. Some partners then subtract owner distributions, taxes or required equipment replacement, which lowers the ratio. Ask which version a partner uses before comparing your figure to theirs.
A DSCR business loan calculator, by hand
This site's calculator covers equipment payments, not DSCR, so the ratio is worked by hand. To find the annual payment for a proposed loan, run the amount, rate and term through the equipment payment calculator with the down payment set to 0, multiply the monthly payment by 12, and add it to existing debt service. The rate you type is your own assumption; partners set real rates.
What partners compare, and what they do not publish
No partner working with Ironport publishes a single DSCR cutoff. Partners compare the ratio with the business's history, the strength of the owners, collateral and the purpose. A thin ratio on a request backed by equipment reads differently from the same ratio on an unsecured loan. How a request moves explains the review, and the six funding types show where coverage matters most.
A second worked example: adding a new loan's payment
Illustration only, with invented figures. A Logan, UT firm has $180,000 of net operating income for the year and $60,000 of annual payments on existing debt. Its ratio today is 180,000 divided by 60,000, or 3.0.
It wants a term loan with a payment of $3,500 a month, $42,000 a year. Add that to existing debt service and the total is $102,000; 180,000 divided by 102,000 is about 1.76. The ratio a partner cares about is the second one, with the new payment included, and partners do not publish the level they look for.
If the new loan also pays off an existing one, remove that old payment before dividing. Refinancing a $1,500 monthly payment as part of the same request would bring annual debt service to $84,000 and the ratio to about 2.14.
Why the ratio matters for small Cache County, UT firms
Cache County had 4,140 employer establishments in 2023, and 62.5% had fewer than five employees (County Business Patterns). For a small firm, one large payment can swing the ratio sharply, which is why running it before a request is worth the twenty minutes. County figures are on the Logan, UT business page; further Cache Valley reading is on the blog.
