Credit analysis · FCCR
FCCR: fixed charge coverage ratio
Last updated · Kaaj editorial team
The fixed charge coverage ratio (FCCR) measures whether a business's cash flow covers all of its fixed obligations: principal and interest, plus rent, lease payments, and similar fixed charges. Lenders use FCCR as a covenant, usually requiring 1.10x to 1.25x, because it is a stricter test than DSCR for businesses with large lease or rent obligations.
FCCR formula
Loan agreements define FCCR precisely, and definitions vary. A common lending version is: (EBITDA − unfinanced capital expenditures − cash taxes − distributions) ÷ (scheduled principal + interest).
Another common version adds rent and lease expense to both sides: (EBITDA + rent and lease expense) ÷ (principal + interest + rent and lease expense). Use the definition in your credit policy or covenant.
FCCR vs. DSCR
DSCR divides cash available for debt service by principal and interest. FCCR also subtracts cash needs the business cannot avoid, such as maintenance capital spending, taxes, and owner distributions, or adds fixed charges like rent to the denominator. For the same business, FCCR is usually lower than DSCR.
Where FCCR is used
- Financial covenants in commercial and asset-based loans, tested quarterly or annually
- Businesses with heavy rent or equipment lease obligations, such as retail, restaurants, and transportation
- Middle-market and sponsor-backed lending, where distributions and capital spending matter
FCCR example
A fictional distributor using the first formula above.
Frequently asked questions
What is a good fixed charge coverage ratio?
Covenants commonly require 1.10x to 1.25x. Above 1.25x leaves a cushion; below 1.0x means fixed obligations exceed available cash flow.
How is FCCR different from DSCR?
DSCR compares cash flow with principal and interest. FCCR subtracts unavoidable cash needs like capital spending, taxes, and distributions, or adds rent and leases to fixed charges, so it is a stricter measure.
What counts as a fixed charge?
Scheduled principal and interest, and depending on the definition, rent, operating lease payments, and other contractual payments the business cannot defer.
Why do lenders subtract distributions in FCCR?
Cash paid to owners is not available to service debt. Subtracting it shows coverage after the owners take their share.