DSCR (Debt Service Coverage Ratio)
DSCR is the headline affordability metric in UK SME lending and is particularly important for secured business loans, commercial mortgages and asset finance over £100,000. A DSCR of 1.0x means cash flow exactly covers debt service with no margin for error. A DSCR of 1.5x means the business generates 50 per cent more cash than it needs to service the debt, giving the lender comfort against a downturn.
What counts as the numerator varies by lender. Some use EBITDA, some use adjusted EBITDA stripping out one-offs, and some use a more conservative cash-flow-after-tax-and-essential-capex figure. The denominator should always include principal plus interest, not just interest. Borrowers comparing offers should ask exactly how each lender calculates DSCR to make sense of the headlines.
DSCR can be stress-tested. A lender may require the deal to maintain a DSCR of 1.25x at a stressed interest rate two or three percentage points above the actual contractual rate, which is particularly common for commercial mortgages and bridging exits. Failing the stress test does not always mean a decline — it can lead to a smaller loan size or a longer term to bring the calculation back into range.
Worked example
How the numbers play out
A trading company has £400,000 EBITDA. It applies for a £1m loan over seven years at 9 per cent, which gives total annual debt service of around £190,000 (£90,000 interest plus £100,000 principal). DSCR: £400,000 / £190,000 = 2.1x — comfortably above the lender's 1.25x minimum.
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