Debt Service Coverage Ratio
Two meetings today, one on Debt Service Coverage Ratio (DSCR) and with the Pre-Qualification Group.Debt Service Coverage Ratio: Definition
1. In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments.
2. In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts.
3. In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
In general, it is calculated by: Net Operating Income/Tota Debt Service
Notes:
A DSCR of less than 1 would mean a negative cash flow. A DSCR of say .95 would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean the borrower would have to delve into their personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.
posted by JD @ 10:14 PM
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