#LoanTipSixty: Debt Service Coverage Ratio

Small Business Loans

July 30, 2019

Are you familiar with CDC’s #LoanTipSixty Video Series, where experts from CDC share financing insights in just 60 seconds? Read below for the key takeaways from our #LoanTipSixty: The Debt Service Coverage Ratio video or watch the video here. Follow the series on CDC’s YouTube Channel.

What Is the Debt Service Coverage Ratio?

You may have heard the term debt service coverage ratio before. Wondering what it means and how to determine what you want your ratio to be to get a small business loan? Read on for a simple explanation from Senior Business Advisor, Eddie Landeros.

The debt service coverage ratio is a number lenders analyze when considering approving a business owner for a loan. In simple terms, it compares your expenses against your revenue. For example, if you are receiving $5,000 in revenue a month, and you have $5,000 in expenses, that is a 1:1 ratio.

What Ratio Do Banks Require?

Banks usually require a 1:1.25 ratio. For example, if you are making $5,000 in revenue, you can only have up to $4,000 in expenses – which includes all your payments. The payments they consider expenses are the total of all expenses which can include a home mortgage, student loan and your business loans. The 1:1.25 ratio requirement can be limiting for small business owners trying to get a loan. Your cash flow may not support the extra $1,000 needed by a bank.

What Ratio Do Alternative Lenders Require?

Alternative lenders like CDC Small Business Finance are a lot more flexible and will accept a 1:1 ratio. The difference in the ratio gives the small business owner more leeway when measuring revenue against expenses.