Debt & Covenants

DSCR — Debt Service
Coverage Ratio

The ratio that tells your bank whether you can pay your debt — what it means, typical covenant levels, and what moves it.

4 min read Concept Guide

What Is It?

DSCR measures whether your business generates enough cash to pay its debt obligations.

DSCR = EBITDA / Total Debt Service

Where Total Debt Service = principal payments + interest payments for the period.

What the Number Means

DSCR	Interpretation
< 1.0x	You cannot cover your debt payments from operations. This is a covenant breach for most lenders.
1.0x – 1.25x	Barely covering debt. Lenders get nervous. Any revenue dip puts you in breach.
1.25x – 1.5x	Typical minimum covenant threshold for GovCon lenders
1.5x – 2.0x	Comfortable. Room to absorb contract losses or delays.
> 2.0x	Strong. You're generating well more than needed to service debt.

Why Lenders Care

Banks lend against your ability to repay. DSCR is the primary measure of that ability. Your loan agreement almost certainly has a DSCR covenant—a minimum ratio you must maintain, tested quarterly or annually.

If you breach the covenant:

The bank may restrict additional borrowing (freeze your line of credit)
They may increase your interest rate
In severe cases, they can accelerate the loan (demand full repayment)

Common GovCon Covenant Levels

Line of credit: DSCR >= 1.25x (tested quarterly)
Term loan: DSCR >= 1.50x (tested annually)
M&A acquisition debt: DSCR >= 1.25x stepping up to 1.50x over time

Your specific covenants depend on your lender and deal terms.

What Moves DSCR

DSCR goes up when:

Revenue grows (more EBITDA)
You pay down principal (less debt service)
You refinance at a lower rate (less interest)

DSCR goes down when:

A major contract ends without replacement
You take on new debt (more debt service)
Indirect rates increase faster than revenue (lower EBITDA)

Where This Appears in Arcvue

Debt & Covenants—covenant monitoring with traffic-light status
Debt Financing—scenario analysis shows DSCR impact of new debt, refinancing, or paydown
M&A Module—pro-forma DSCR after acquisition debt
Scenario Planning—what-if impact on covenant compliance

The Operator's View

If you’ve had any interaction with banks around debt financing, you’ve likely encountered leverage ratios—the amount of debt on the balance sheet expressed as a function of EBITDA. Think of it like a loan-to-value ratio on a home: EBITDA is what would drive the valuation of the business in a default event, and the bank wants to know how much debt is stacked against it.

DSCR approaches the question from a different angle. Where leverage ratio looks at the balance sheet, DSCR looks at cash flow—less “how much did you borrow relative to what you’re worth” and more “can you actually make the payment.” The analogy is your income relative to your mortgage: the bank isn’t just asking if the house is worth more than the loan, they’re asking whether you can service it every month without white-knuckling it.

Banks don’t want businesses making ends meet. They want margin. A DSCR below 1.0 means the business isn’t generating enough net operating income to cover its debt obligations—full stop. Unlike leverage ratios where context matters, with DSCR the direction is unambiguous: higher is always better, and anything under 1.0 is a problem that no relationship or track record will paper over for long.