Equipment finance underwriting guide
How to calculate DSCR for equipment finance: formula, calculator, and worked example
Last updated · Kaaj editorial team
DSCR (debt service coverage ratio) is cash available for debt service divided by total debt service. For an equipment deal, cash available is usually net income plus depreciation and amortization, interest expense, and any add-backs your policy allows; debt service is existing annual principal and interest plus twelve months of the proposed equipment payment. A DSCR of 1.25x means the business earns $1.25 for every $1.00 of debt payments, a common minimum for many lenders. When financials are stale or missing, estimate cash flow from recent bank statements, and include daily or weekly MCA debits in debt service.
How to calculate DSCR in 8 steps
The same steps work for loans and leases. Use your credit policy's definitions wherever it differs.
Choose the income source
Use business tax returns or financial statements for historical cash flow, and recent bank statements for interim or current cash flow. Many lenders check both.
Start from net income
Take annual net income from the tax return or income statement for the most recent full year.
Add back non-cash and financing costs
Add depreciation, amortization, and interest expense. Interest is added back because it is paid out of the debt service you are measuring.
Apply policy add-backs
Add one-time expenses, excess owner compensation, or other items your policy allows, and document each one.
Build the debt schedule
List every existing obligation with its annual principal and interest. Remove debts that will be paid off at closing, and annualize daily or weekly MCA debits found in bank statements.
Add the proposed payment
Add twelve months of the new equipment loan or lease payment to existing debt service.
Divide and compare to policy
DSCR equals cash available divided by total debt service. Compare it with your minimum and note how much room there is.
Check global DSCR when needed
When guarantors or related entities support the deal, combine their cash flow and debt service, removing intercompany items, and calculate global DSCR.
DSCR calculator for equipment loans and leases
Enter annual figures to see DSCR, total debt service, and the largest monthly payment the business can support at your minimum.
Debt service coverage ratio
1.72x
Meets the 1.25x minimum
DSCR = (net income + depreciation and amortization + interest + add-backs) ÷ (existing annual debt service + proposed payment × 12).
Worked example
A fictional freight carrier requesting a truck-tractor loan with a $3,150 monthly payment.
| Line | Amount |
|---|---|
| Net income | $180,000 |
| + Depreciation and amortization | $95,000 |
| + Interest expense | $22,000 |
| + One-time repair add-back | $8,000 |
| = Cash available for debt service | $305,000 |
| Existing annual debt service | $140,000 |
| + Proposed payment ($3,150 × 12) | $37,800 |
| = Total debt service | $177,800 |
| DSCR ($305,000 ÷ $177,800) | 1.72x |
Tax returns vs. financial statements vs. bank statements
| Source | Best for | Watch out for |
|---|---|---|
| Business tax returns | Verified historical income for small businesses | Aggressive depreciation and owner expenses that understate cash flow |
| Financial statements | Mid-ticket and larger deals, interim periods | Unaudited statements; confirm against returns or bank activity |
| Bank statements | Current cash flow, businesses without recent financials, MCA exposure | Transfers, loan proceeds, and owner injections counted as revenue |
Common DSCR adjustments
| Adjustment | Direction | Why |
|---|---|---|
| Depreciation and amortization | Add back | Non-cash expense |
| Interest expense | Add back | Paid from the debt service being measured |
| One-time or non-recurring expenses | Add back | Will not repeat; document it |
| Excess owner compensation | Add back if policy allows | Discretionary cash the owner can redirect |
| Debt paid off at closing | Remove from debt service | No longer an obligation |
| MCA daily or weekly debits | Add to debt service, annualized | Real repayment obligations often missing from the debt schedule |
| Distributions or owner draws | Subtract if recurring | Cash that is not available for debt service |
What DSCR levels usually mean
Thresholds vary by lender, asset, and risk tier. These are general reference points, not policy.
| DSCR | Reading |
|---|---|
| Below 1.00x | Cash flow does not cover debt payments |
| 1.00x to 1.20x | Thin coverage; usually needs strong collateral, guarantor support, or structure |
| 1.25x | A common minimum for small business and equipment lending |
| 1.50x and above | Comfortable coverage with room for a downturn |
Frequently asked questions
What is the DSCR formula for equipment finance?
DSCR equals cash available for debt service divided by total annual debt service. Cash available is usually net income plus depreciation, amortization, interest, and allowed add-backs; debt service is existing principal and interest plus twelve months of the proposed payment.
How do you calculate DSCR from bank statements?
Estimate annual operating cash flow from true revenue minus operating outflows, excluding transfers, loan proceeds, and owner injections. Then divide by annual debt service, including existing loan payments, annualized MCA debits, and the proposed payment.
How do you calculate DSCR from tax returns?
Start with net income on the business return, add back depreciation, amortization, interest, and allowed one-time items, and divide by annual debt service including the new payment.
What is a good DSCR for an equipment loan?
Many lenders use 1.25x as a minimum. Below 1.00x, cash flow does not cover payments; above 1.50x, coverage is comfortable. Your credit policy sets the threshold.
Should MCA payments be included in DSCR?
Yes. Daily or weekly MCA debits are real repayment obligations, so annualize them from bank statements and include them in debt service, even if they are missing from the borrower's debt schedule.
What is global DSCR?
Global DSCR combines the cash flow and debt service of the borrower, its guarantors, and related entities, after removing intercompany items, to show whether the whole group can support the debt.
Can Kaaj calculate DSCR for equipment finance deals?
Yes. Kaaj calculates DSCR from bank statements, tax returns, and financial statements the way your policy defines it, including the proposed equipment payment and an editable debt schedule.
Get DSCR on every deal without the spreadsheet
Kaaj calculates DSCR from bank statements, tax returns, and financial statements the way your policy defines it, with an editable debt schedule and MCA debits included.