Debt Service Coverage Ratio: How Lenders Size a Business Loan, Worked Through

In short: The debt service coverage ratio (DSCR) divides the cash a business generates by the repayments it must make. Lenders size a business loan by working backwards: adjusted EBITDA, less tax and essential capex, divided by their target DSCR gives the most the business can repay each year. That payment, at the assessment rate and term, sets the maximum loan, and a change in rate, term or target moves it by hundreds of thousands.

Key takeaways

DSCR = cash available for debt service / (interest + scheduled principal), across all of the business's debt.
Lenders start from EBITDA, accept documented one-off add-backs, then deduct tax and maintenance capex.
Target DSCRs for trading businesses often sit around 1.25 to 1.5 times: indicative, and varying by lender and industry.
In the worked example, a 10-year term supports about $2.26 million and a 5-year term about $1.36 million.
A one-point rate rise takes the same loan from a DSCR of 1.30 to about 1.25 times.

What does DSCR measure, and why do lenders size loans with it?

DSCR answers one question: if the year goes as forecast, how many times over can the business meet its loan repayments from its own cash? A DSCR of 1.0 means every dollar of cash earnings goes to lenders. A DSCR of 1.30 leaves 30 cents of margin for every dollar of repayment, and lenders want that margin because earnings move while repayments do not.

For trading businesses, DSCR is usually the main sizing tool and security comes second. Business.gov.au's business loan guidance lists income, expenses, debts and cash flow as the finances to understand before you borrow; DSCR is how a credit analyst turns those four into one number. Property security can make a loan cheaper, but it rarely turns an unaffordable loan into an acceptable one for a bank.

Measure	Formula	Question it answers
DSCR	Cash available for debt service / (interest + principal)	Can the business repay from cash?
ICR	EBIT or EBITDA / interest	Can it pay the interest?
Debt / EBITDA	Total debt / EBITDA	How many years of earnings the debt represents
LVR	Loan / security value	What is left if it cannot repay?

Step 1: how do lenders get from net profit to EBITDA?

Business.gov.au's key financial terms define net profit as total gross profit minus all business expenses. A lender starts there and adds back items that are either non-cash or will not recur. Every add-back needs a document behind it.

Worked example (illustrative figures). A distribution business wants to refinance its existing debt and fund a fit-out. Its last financial year:

Line	Amount	Lender's usual view
Net profit before tax	$410,000	Starting point, from accountant-prepared financials
Add interest on debt being refinanced	$85,000	Accepted: replaced by the new loan's interest
Add depreciation and amortisation	$140,000	Accepted: non-cash
EBITDA	$635,000
Add one-off legal costs from a settled dispute	$35,000	Usually accepted with invoices and an explanation
Add private vehicle costs run through the business	$15,000	Accepted by some lenders, questioned by others
Adjusted EBITDA	$685,000

What lenders resist: "one-off" costs that appear every year, add-backs for revenue the business expects but has not earned, and owners paid far below market. Where a working owner takes a token salary, some lenders deduct a notional market wage, because a replacement manager would cost that much.

Step 2: what counts as cash available for debt service?

EBITDA is not cash the lender can rely on. Two deductions are near-universal and a third depends on how the owners are paid.

Tax. Actual tax paid, or a notional rate on taxable profit. In the example, $105,000.
Maintenance capital expenditure. The spending needed simply to stay in business: replacing forklifts, vehicles and computers. Not growth capex. In the example, $60,000.
Owners' drawings or dividends. If the owners live on dividends instead of wages, lenders deduct what they need to draw, because that cash is not available for the loan.

Cash available for debt service in the example: $685,000 - $105,000 - $60,000 = $520,000.

Lenders differ here. Some apply the DSCR to EBITDA with no deductions and set a higher target instead; others deduct every dollar of distributions. Ask which definition a lender uses before comparing its target with another lender's, and test your own figures in the ICR and DSCR calculator.

What DSCR will a lender look for?

There is no single regulated DSCR for business lending: each lender sets its own credit policy. The ranges below are indicative only and vary by lender, industry, loan size and security.

Lender and loan type	Test often applied (indicative)	Weight on cash flow
Bank, established trading business	DSCR around 1.25 to 1.5 times	High: cash flow is the primary test
Bank, commercial property investment	ICR around 1.5 to 2.0 times on net rent	High, alongside LVR
Non-bank cash flow or low-doc lender	Often a simpler test on EBITDA or BAS turnover	Medium: pricing carries more of the risk
Short-term property-secured lender	Little or no DSCR test; LVR and exit matter more	Low: security and exit carry the decision

The target rises with risk: volatile earnings, one customer providing a large share of revenue, a short trading history, or a loan for goodwill instead of hard assets. It also drives price, as risk-based pricing explains: a borrower at 1.6 times is a different credit from one at 1.26 times, even if both pass.

The denominator is all debt service, not just the new loan. Equipment finance, vehicle loans and an ATO payment plan all count.

Step 3: how do you turn a target DSCR into a maximum loan?

Work backwards from cash available. In the example, with a target of 1.30 times:

Maximum total debt service: $520,000 / 1.30 = $400,000 a year.
Less existing equipment finance repayments that stay: $64,000.
Available for the new loan: $336,000 a year, or $28,000 a month.

The maximum loan is the amount that $28,000 a month repays over the term at the assessment rate: Loan = payment x (1 - (1 + r)^-n) / r, with r the monthly rate and n the number of months. At an illustrative 8.5% (an example, not an offer) over 10 years, that is about $2,258,000.

Assessment rate (illustrative)	5-year term	7-year term	10-year term
7.5%	$1,397,000	$1,825,000	$2,359,000
8.5%	$1,365,000	$1,768,000	$2,258,000
9.5%	$1,333,000	$1,713,000	$2,164,000
10.5%	$1,303,000	$1,661,000	$2,075,000

Term moves the answer more than rate. At 8.5%, going from 5 to 10 years adds about $894,000 of capacity, while a two-point rate change moves the 10-year figure by about $183,000. Lenders will not stretch the term freely, though: they match it to what the money buys, so goodwill and fit-outs usually get shorter terms than property.

How sensitive is the answer to interest rates?

Suppose the business borrows the full $2,258,000 over 10 years at 8.5% and the rate then rises.

Rate	Annual repayments on the new loan	Total debt service	DSCR
8.5%	$336,000	$400,000	1.30
9.5%	$350,700	$414,700	1.25
10.5%	$365,700	$429,700	1.21

A loan sized exactly to the target has no room for a rate rise, which is why many lenders assess at the actual rate plus a margin. Sized at 10.5% instead, the maximum loan is about $2,075,000, and at the actual 8.5% its DSCR is about 1.40. Unlike home lending, where APRA expects banks to assess serviceability with a buffer of 3 percentage points (confirmed in APRA's 28 May 2026 release), each business lender chooses its own sensitivity.

Many variable business loans are priced off a benchmark such as BBSW or the lender's own reference rate, which tends to move with the cash rate; BBSW explained for business lending covers the mechanics. The RBA's cash rate target was 4.60% from 30 September 2026, and the RBA's 2026 meeting schedule has decisions on Tuesday 3 November and Tuesday 8 December 2026, so check the current target before you rely on any figure here. The RBA's statistical tables also publish average business lending rates.

What else caps the loan besides DSCR?

DSCR is rarely the only test, and the lender lends the smallest amount that passes all of them. Continuing the example, assume the equipment finance still owes $210,000.

Test (illustrative limits)	Maximum new loan
DSCR 1.30 times, 8.5%, 10 years	$2,258,000
DSCR 1.30 times, assessed at 10.5%, 10 years	$2,075,000
Total debt no more than 3.0 times adjusted EBITDA (3.0 x $685,000 = $2,055,000, less $210,000 existing)	$1,845,000
DSCR 1.30 times, 8.5%, 5 years	$1,365,000

Here the leverage test binds before the DSCR on a 10-year term: total debt of $2,468,000 against $685,000 of adjusted EBITDA is 3.6 times. Other caps include the LVR on any property security, the purpose (lenders lend more readily against hard assets than goodwill), and the trend: if EBITDA fell over three years, a lender may use an average or the latest year, whichever is lower.

How do you get the lender's DSCR to match yours?

Most disagreements about borrowing capacity are disagreements about the inputs. Close them before the lender's analyst does the work:

Reconcile every add-back to an invoice, a settlement letter or a ledger line.
List every debt, including equipment finance, vehicle loans, credit cards in the business name and any ATO payment plan.
Provide two to three years of financials and current year-to-date management accounts, so the trend is visible.
Explain the trend in a page: why earnings rose or fell, and what is different now.
Add a forecast that shows the DSCR each quarter after the new loan; see cash flow forecasts lenders accept.
Ask each lender for its definition and target before comparing offers.

When you are ready, post one business loan request on ADS and 200+ verified lenders and brokers can ask about it. Speak to your accountant before you present adjusted figures to a lender.

Frequently asked questions

What is a good DSCR for a business loan?

Many lenders look for a DSCR of around 1.25 to 1.5 times for an established trading business, but that is indicative and varies by lender, industry and definition. A higher ratio gives you headroom for a soft year or a rate rise and usually supports better pricing. Below about 1.2 times, most mainstream lenders will want a smaller loan or more equity.

How do I calculate DSCR?

Take EBITDA, add back documented one-off costs, deduct tax and maintenance capex, and divide the result by a year of interest plus scheduled principal on all business debt. In the worked example, $520,000 of cash available against $400,000 of debt service gives a DSCR of 1.30 times.

Does DSCR include my existing loans?

Yes. Lenders put every repayment the business makes in the denominator: the new loan, equipment and vehicle finance, overdraft interest and any ATO payment plan. Leaving one out of your own calculation is the most common reason a lender offers less than the borrower expected.

What add-backs will a lender accept?

Lenders usually accept depreciation, amortisation, interest on debt being refinanced, and genuinely one-off costs supported by documents, such as legal fees from a settled dispute. They resist recurring "one-offs", expected but unearned revenue, and personal costs without evidence. Some deduct a market salary for an owner who pays themselves very little.

How does a rate rise affect my DSCR?

A rate rise increases interest, and on a principal and interest loan the repayment, so the denominator grows while cash earnings stay the same. In the example, a one-point rise takes a loan sized at 1.30 times down to about 1.25 times, and a two-point rise to about 1.21 times.

Sources

Business loan guidance — business.gov.au
Key financial terms (net profit, gross profit, cash flow) — business.gov.au
Cash rate target (4.60% from 30 September 2026) — Reserve Bank of Australia
Monetary Policy Board meeting dates for 2026 — Reserve Bank of Australia
Statistical tables, including business lending rates — Reserve Bank of Australia
APRA maintains macroprudential settings: 3 percentage point serviceability buffer (28 May 2026) — Australian Prudential Regulation Authority

Rates checked as at 24 October 2026. Interest rates, lender policies and government schemes change frequently. Figures in this article are illustrative and were accurate at the date shown.

General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.

Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.