When you apply for a business loan, bankers speak a language of numbers and ratios. Two of the most important terms you will encounter are DSCR and ISCR. While they might sound complex, they are simple tools that banks use to answer one fundamental question: "Does this business generate enough profit to repay its debts?"
Understanding these ratios is not just for your banker; it's crucial for you as a business owner. It helps you gauge the financial health of your own company and see your business from a lender's perspective. This guide will break down DSCR and ISCR in simple terms.
Think of these ratios as a health check-up for your business's ability to handle debt. A strong score gives the bank confidence, while a weak score signals risk.
ISCR: The Interest Coverage Test
The Interest Service Coverage Ratio (ISCR) is the first and most basic test. It measures if your business earns enough profit to cover just the interest payments on your loans.
ISCR = (EBIT) / Interest Expense
Where EBIT is your Earnings Before Interest and Taxes.
An ISCR of 2 means that for every ₹1 of interest you owe, you are generating ₹2 in profit to pay for it. Most banks look for an ISCR of at least 2 or higher. While important, ISCR only tells part of the story because businesses must pay back more than just interest.
DSCR: The Complete Debt Repayment Test
The Debt Service Coverage Ratio (DSCR) is the gold standard for bankers. It provides a more complete picture by measuring if your business earns enough profit to cover your entire debt obligation for the year – both the interest and the principal loan amount.
DSCR = (Net Operating Income + Depreciation) / Total Debt Service
Where Total Debt Service is your total principal and interest payments for the year.
A DSCR of 1.0 means you have exactly enough cash flow to pay your debts. This is risky for a bank. Most lenders want to see a DSCR of 1.5 or higher, which indicates a healthy cash cushion to handle your debt payments comfortably, even if profits dip slightly.
Why is a Project Report Crucial for DSCR & ISCR?
Calculating these ratios requires accurate financial projections. A professional Detailed Project Report (DPR) is essential because it:
- Provides Accurate Projections: It lays out a logical and believable forecast of your revenues and expenses, forming the basis for your EBIT and Net Operating Income.
- Justifies the Numbers: The DPR explains the 'why' behind your projections through market and operational analysis, giving the banker confidence in your figures.
- Ensures Compliance: A professional service like Projectzo ensures that these ratios are calculated correctly and presented in the exact format banks require, preventing unnecessary queries.
In conclusion, while you focus on your business vision, understanding DSCR and ISCR allows you to speak your banker's language. A strong project report doesn't just present these numbers; it builds a convincing argument that your business is a safe and profitable investment for the bank.