Why DSCR matters

DSCR is a key underwriting metric lenders use to judge repayment capacity and set loan terms. Many commercial underwriters and small‑business lenders look for a DSCR in the 1.25–1.5 range, though requirements vary by lender and loan type (SBA; Federal Reserve). Improving DSCR can lower borrowing costs, unlock refinancing, or avoid covenant breaches.

Quick formula and example

  • Formula: DSCR = Net Operating Income / Total Debt Service (principal + interest).
  • Example: Net operating income = $200,000; annual debt service = $150,000 → DSCR = 1.33.

Ways to improve DSCR without increasing revenue

Below are practical, lender‑friendly tactics that focus on the expense, financing, and accounting side rather than top‑line growth.

1) Refinance or extend maturities

  • Lowering the annual debt service by extending loan terms or refinancing to a lower rate directly raises DSCR. Example: reducing annual debt service from $150k to $120k raises DSCR from 1.33 to 1.67.
  • Watch for total interest cost and prepayment penalties.

2) Convert variable payments to fixed or interest‑only periods

  • Short, planned interest‑only periods or temporarily swapping to lower initial payments can improve near‑term DSCR during seasonality or growth investments.

3) Renegotiate payment schedules and covenants

  • Ask lenders for modified amortization, grace periods, or covenant waivers. A short waiver can prevent covenant default while you implement efficiency measures (see our guide on DSCR waivers).

4) Reduce controllable operating costs

  • Target gross margin and SG&A improvements: renegotiate vendor contracts, cut low‑margin product lines, optimize staffing, or outsource noncore functions.
  • In my practice, a targeted vendor renegotiation that cut COGS by 4% raised DSCR materially within one quarter.

5) Improve working capital management

  • Tighten receivables, negotiate payables, and reduce inventory carrying costs to boost operating cash flow. Faster collections and vendor terms shifts often increase NOI without raising sales.

6) Sell nonproductive assets or use sale‑leaseback

  • Converting idle assets into cash can pay down high‑cost debt or fund a refinance that lowers annual debt service.

7) Capitalize vs. expense timing adjustments (accounting‑aware)

  • Where legitimate under accounting standards, defer certain capital expenditures or accelerate deductible expenses to smooth reported NOI. Always coordinate with your accountant to ensure compliance.

8) Reduce discretionary cash draws

  • Owners can temporarily reduce draws/dividends to increase company NOI available for debt service, improving DSCR for lender reviews.

9) Use short‑term bridge or subordinated financing strategically

  • Adding appropriately priced subordinated capital may improve senior DSCR ratios for underwriting, but watch overall leverage and cost.

10) Conduct routine stress tests and scenario modeling

Practical checklist to act now

  • Run a 12‑month pro forma showing current DSCR and alternative scenarios (refinance, 5–10% cost cuts, interest‑only period).
  • Prioritize actions with fastest impact and lowest cost (vendor renegotiation, receivables collection).
  • Discuss restructuring options with your lender early — many will negotiate to avoid defaults.

Common mistakes and cautions

  • Chasing one‑time accounting fixes without sustainable cashflow changes can mislead lenders and create problems at renewal.
  • Extending term reduces annual payments but can increase lifetime interest — evaluate total cost vs. DSCR benefit.
  • Don’t treat DSCR as the only metric; lenders also consider liquidity, collateral, and EBITDA stability.

In my practice

I’ve helped small businesses raise DSCR from sub‑1.0 to operationally sustainable levels by combining a 6‑month vendor renegotiation plan, tighter collections, and a refinance that trimmed annual payments 20%. The combined effect improved lender appetite and produced better loan terms.

Authoritative sources

Internal resources

Professional disclaimer

This content is educational and does not constitute personalized financial or legal advice. Consult your CPA or financial advisor before changing accounting methods or executing a refinancing strategy.