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Debt Service Ratio and Debt Coverage Ratio mean the same thing.

To calculate,

* Add back any interest expense to get 'Cashflow Available to Pay Debt'. * Divide Cashflow Available to Pay Debt' by the debt payments for the period. * An answer of 1.0 or better means there is just enough cashflow to cover the debt. * Most lenders want to see 1.2 to 1.3 for a business Example:

Net Income for the year

$5,000 after a deduction of $10,000 interest expense.

Debt payments of $1,200 per month. ($1,200 x 12 =$14,400 per year)

Cashflow Available to pay Debt

$5,000 plus $10,000 equals $15,000.

Debt Service Ratio:

$15,000/$14,400

1.04

Probably not enough to keep the commercial lenders happy.

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โˆ™ 2007-09-03 19:28:56
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