What is a debt service coverage ratio and what do lenders want to see?
A debt service coverage ratio measures how many times your earnings cover your loan repayments over a year. Most commercial lenders want to see more than one. Many look for something around 1.25 to 1.5 times so there is room for a bad quarter. The exact benchmark shifts with the industry, the security and how steady your income looks. It is one of the first numbers a credit assessor works out, often before they read anything else in the file.
How lenders work the number out
Take your earnings before interest, tax, depreciation and amortisation, then divide by the total repayments due on all debt for the year. Picture a business with around $500,000 of adjusted earnings against $400,000 of annual repayments. On those numbers it lands at 1.25 times. Lenders rarely use the raw accounting figure though. They add back one off costs and owner benefits a new owner would not carry, then take out anything they think is understated, such as a director paying themselves well below a market wage.
What lifts or drops the number
Anything that changes either half of the sum moves it. Paying out a short term facility with expensive weekly repayments can lift the ratio sharply, even though the debt has not gone anywhere, simply because the repayment schedule has stretched. New debt drops it. So does a soft trading year, which is why lenders often look at the ratio across more than one set of accounts. If your figure is sitting close to the line, an accountant who can present the add backs properly is worth more than another lender application.
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Last updated 15th July 2026. Reviewed by Authorised Credit Representative 554584 of Australian Credit Licence 414426.