AFO · Glossary
Debt Service Coverage Ratio (DSCR)
The ratio of a business's operating cash flow to its scheduled debt service — the lender's single most-watched number.
What this term means in practice
DSCR measures whether the business produces enough cash to service its debt. The most common definition is EBITDA ÷ (annual principal + interest payments), but lenders adjust the formula to fit the situation — some use EBITDA less unfinanced capex, some test on cash flow after tax, some use a 12-month trailing average rather than a snapshot.
Most Canadian commercial lenders require a DSCR of 1.20x to 1.50x at facility origination, with the threshold falling with credit quality (a higher-rated borrower can get a 1.10x covenant; an asset-light services business may need 1.50x). The covenant ratio is usually set with a buffer below the underwriting ratio — a deal closing at 1.40x might carry a 1.20x covenant so a soft quarter doesn't trigger a breach.
DSCR is also the metric the CPA models forward to determine how much debt the business can carry on the projected cash flow. The proposed facility size is sized so the post-close coverage clears the lender's threshold with realistic assumptions on the projection — not optimistic ones.
Where this matters in the catalog
Programs that turn on Debt Service Coverage Ratio.
Conventional Senior Term Loan or Revolver
Cash-flow-underwritten facility from a chartered bank, credit union, or Schedule II lender.
Mezzanine Debt
Second-lien or subordinated debt when senior capacity is exhausted.
Private Credit / Unitranche
Bespoke debt structures from non-bank private credit funds. Big-ticket only.
Where the definition meets your situation.
The CPA can walk through how this concept applies to your business in twenty minutes — what providers will ask, where the negotiation matters, what the trade-offs actually look like in your numbers.