Debt service coverage ratio calculation is basically a measurement of the capacity of an individual, firm or organization’s capacity to repay current debts with the available funds (cash flows).
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The DSCR formula is as follows:
DSCR = Net Operating Income / Total Debt Service
The Net Operating Income is calculated as revenue minus operating expenses, taxes and interest payments whereas Total Debt Service is debt payable to the lenders.
Debt Service Coverage Ratio is usually calculated in commercial lending transactions in the real estate industry.
If DSCR calculation is ‘1’ this means that the business has just enough cash flow to repay debts. If the calculation is more than ‘1,’ it indicates that the business has more cash flow than its debts. If the calculation is less than ‘1’ then the cash flow is lesser than the debts.
DSCR is an important factor considered by banks and financial institutions for loan approval. A higher DSCR may attract quick loan approval, flexible repayment terms, and lower interest rates. Whereas, if DSCR is lower than 1, then the borrowers can get loan approval by establishing a debt service reserve account.
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What is debt service coverage ratio formula?
Neha
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4 Year
2021-03-31T13:18:56+00:00 2021-03-31T13:22:00+00:00Comment
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