Affordability ratio: DSCR and free-cash-flow-to-debt-service
DSCR is the headline affordability number every UK SMB lender uses for term debt and commercial mortgages. This page works through DSCR at the four thresholds lenders care about: 1.0, 1.25, 1.5 and 2.0. It also covers the stricter free-cash-flow-to-debt-service ratio for capital-intensive businesses.
The maths in plain English
Take a UK limited company with £600,000 revenue, £150,000 EBITDA (25% margin), £20,000 corporation tax (after capital allowances), and £15,000 maintenance capex.
Now suppose it borrows £200,000 over 5 years at 9% APR. Annual debt service is approximately £49,800 (around £4,150 per month).
DSCR = £150,000 / £49,800 = 3.01. Comfortably above any UK lender threshold.
FCF-to-DS = (£150,000 minus £20,000 minus £15,000) / £49,800 = £115,000 / £49,800 = 2.31. Still strong.
The same business at the same EBITDA but borrowing £600,000 over 5 years at 9% has annual debt service of approximately £149,400. DSCR drops to 1.00, FCF-to-DS to 0.77. The mainstream lender declines on both ratios.
| Item | Value |
|---|---|
| Revenue | £600,000 |
| EBITDA (25% margin) | £150,000 |
| Corporation tax | £20,000 |
| Maintenance capex | £15,000 |
| Proposed borrowing | £200,000 over 5 years at 9% APR |
| Annual debt service | approximately £49,800 (£4,150 per month) |
| DSCR (EBITDA / debt service) | 3.01 |
| FCF-to-debt-service | 2.31 |
| Lender view | Passes every UK SMB threshold |
Source: FundBiz affordability ratio worked example
Same business borrowing £600,000 at the same rate and term: annual debt service approximately £149,400, DSCR 1.00, FCF-to-DS 0.77, mainstream decline on both ratios. DSCR = EBITDA / annual debt service. FCF-to-DS = (EBITDA minus tax minus maintenance capex) / annual debt service.
View as plain-text Markdown
### Worked example: DSCR and FCF-to-debt-service on a £200,000 facility | Item | Value | | --- | --- | | Revenue | £600,000 | | EBITDA (25% margin) | £150,000 | | Corporation tax | £20,000 | | Maintenance capex | £15,000 | | Proposed borrowing | £200,000 over 5 years at 9% APR | | Annual debt service | approximately £49,800 (£4,150 per month) | | DSCR (EBITDA / debt service) | 3.01 | | FCF-to-debt-service | 2.31 | | Lender view | Passes every UK SMB threshold | Source: FundBiz affordability ratio worked example Same business borrowing £600,000 at the same rate and term: annual debt service approximately £149,400, DSCR 1.00, FCF-to-DS 0.77, mainstream decline on both ratios. DSCR = EBITDA / annual debt service. FCF-to-DS = (EBITDA minus tax minus maintenance capex) / annual debt service.
Worked example: DSCR at the four thresholds
Same £150,000 EBITDA business, varying the proposed debt service to land on each DSCR threshold.
| DSCR | Annual debt service | Approx. ticket (5 yr, 9%) | Lender view |
|---|---|---|---|
| 1.00 | £150,000 | ~£600,000 | Decline. Zero buffer for any downside. |
| 1.25 | £120,000 | ~£480,000 | Minimum acceptable for many SMB term lenders. Tight pricing. |
| 1.50 | £100,000 | ~£400,000 | Comfortable. Mainstream pricing accessible. |
| 2.00 | £75,000 | ~£300,000 | Strong. Best-tier pricing, multi-year facilities. |
The same EBITDA supports anywhere from £300,000 to £600,000 of debt depending on which DSCR threshold the lender holds you to.
“An annual DSCR is an average and it hides the lean months. A seasonal business showing 1.5 on the year can sit below 1.0 in its weakest quarter, which is the number a careful lender will test. The EBITDA-based version also flatters capex-heavy businesses: if real maintenance capex eats a third of EBITDA, the free-cash-flow version is the honest one, and lenders that sensitise the forecast (revenue down 10%, costs up 5%) can decline a deal that passes 1.5 on paper.”
Worked example: FCF-to-DS for a capex-heavy business
Manufacturing business, £150,000 EBITDA, £20,000 tax, £40,000 maintenance capex (replacement tooling, vehicle wear).
Free cash flow = £150,000 minus £20,000 minus £40,000 = £90,000.
If the business borrows £400,000 over 5 years at 9%, annual debt service is approximately £99,600.
- DSCR = £150,000 / £99,600 = 1.51 (passes a 1.5 threshold)
- FCF-to-DS = £90,000 / £99,600 = 0.90 (fails)
A lender using DSCR alone approves; a lender using FCF-to-DS declines. For capex-heavy sectors the FCF-to-DS view is the right one because the capex is real and ongoing, not optional.
When this number matters
DSCR matters for any product where the lender is taking repayment risk on cash flow rather than on assets:
- Term loans (unsecured or secured): primary affordability test.
- Commercial mortgages: typically the binding constraint above LTV.
- Asset finance at higher tickets (over £150,000) where the asset alone may not fully cover default.
- Refinancing existing debt: lender wants to see DSCR holds across the new facility plus any retained debt.
It matters less for MCA (cash flow is observed daily through card receipts), bridging (assessed on exit, not cash flow), and invoice finance (assessed on debtor quality and concentration).
FAQs
What is DSCR?
Debt-service coverage ratio. The ratio of operating cash flow available to service debt against the actual debt service due in the period. A DSCR of 1.0 means every pound of available cash goes to debt service. UK lenders typically want 1.25 to 1.5 minimum for term loans and 1.4 to 1.6 for commercial mortgages.
What is free cash flow to debt service?
A more conservative ratio: free cash flow (operating cash flow minus capex and tax) divided by debt service. It strips out the cash needed to maintain the asset base, leaving a true measure of repayment capacity. Lenders use it for capital-intensive sectors (manufacturing, transport) where capex requirements are non-trivial.
How is DSCR calculated?
Numerator: EBITDA (or sometimes EBITDA minus tax) for the period. Denominator: principal plus interest payments due in the same period across all debt facilities. EBITDA / debt service equals DSCR. Some lenders use a stricter "EBITDA minus capex" version, which is closer to free-cash-flow-to-debt-service.
What DSCR do UK SMB lenders typically want?
Term loans: 1.25 to 1.5 minimum, with 1.5+ securing best pricing. Asset finance: 1.2 to 1.4, lower because the asset is recoverable. Commercial mortgages: 1.4 to 1.6. Bridging: not assessed on DSCR, but on exit (sale or refinance). MCA: not formally DSCR-tested but priced into factor based on cash-flow stress.
What if my DSCR is below 1.0?
You cannot service the proposed debt from current cash flow. Mainstream lenders will decline. Options: reduce the ticket size, lengthen the term to lower monthly debt service, restructure existing debt to free up coverage, or use a product that does not depend on DSCR (asset finance against new revenue, MCA against future receipts, R&D advance against a tax credit).
What is the difference between DSCR and interest coverage?
Interest coverage (EBITDA / interest only) ignores principal repayment. It is generous and lenders rarely use it alone for SMB term debt. DSCR includes principal, which matters because principal is real cash out the door each month. Always use DSCR, not interest coverage, for SMB affordability.
Should DSCR be calculated on actuals or forecast?
Both. Lenders typically want trailing 12-month actuals as a base case and a forecast covering the loan term as a stress test. They then sensitise the forecast (revenue down 10%, costs up 5%) to check DSCR holds above 1.0 even in a downside.
How does seasonality affect DSCR?
A business with a strong Q4 and weak Q1 might show a healthy annual DSCR but be unable to service debt in January or February. Lenders for seasonal businesses look at the worst-quarter DSCR, not just the annual figure, and may require a debt-service reserve account to cover the lean months.
Run the matcher
Tell us your turnover, EBITDA and the ticket you want. We surface the panel lenders whose DSCR thresholds your profile clears, with indicative pricing for each.
Open eligibility matcher →By Oliver Mackman. Last reviewed 12 June 2026.