Key takeaways
- Reconcile the rows before comparing ratios.
- Keep each deduction visible and count it once.
- Retain the same period in every row.
What does DSCR measure?
Canada's BDC illustrates DSCR with an EBITDA numerator and warns that methods differ. BDC's explanation is Canadian lender education, not a US dental lending rule.
Chase's educational guide uses net operating income divided by principal and interest. It also says there is no universal standard for a good ratio. Neither source establishes the formula or approval condition in your proposed loan.
Reconcile two ratios before comparing them
Ask for the numerator, denominator, covered borrower and period behind each figure. A ratio copied from a seller worksheet may answer a different question from the lender's calculation. Use the underwriting guide for the wider application review.
Consider invented annual figures for a proposed dental purchase. A worksheet reports $200,000 of operating surplus before owner clinical pay and equipment replacements. Assume it already includes all other cash operating costs, has no noncash entries or receipt timing differences, and excludes debt payments and taxes. This is a supplied worksheet measure, not a formal EBITDA definition.
For this comparison, the buyer requires $35,000 for clinical work and $15,000 for equipment replacements. Neither amount was deducted earlier. The acquisition loan requires $120,000 of annual principal and interest. A separate existing equipment loan adds $20,000. Assume both debts remain payable by the modeled practice for the full year.
| Worksheet view | Numerator | Annual debt payments | Calculated ratio |
|---|---|---|---|
| Reported surplus, acquisition loan only | $200,000 | $120,000 | 1.67 |
| After the two supplied cash deductions | $150,000 | $120,000 | 1.25 |
| Same cash measure, both loans included | $150,000 | $140,000 | 1.07 |
The last row leaves $10,000 after modeled debt payments, before taxes and any omitted needs. The practice has not become less profitable between rows. The worksheet's scope changed. These ratios are comparison outputs, not lender definitions or approval thresholds.
Change one input at a time
Independently reduce required clinical pay to $25,000, holding all other final-row inputs fixed. Cash becomes $160,000 and coverage is 1.14. Instead, leave clinical pay at $35,000 and reduce the equipment loan's annual payments to $10,000. Cash stays $150,000; total debt payments become $130,000 and coverage is 1.15. Displayed ratios round to two decimals.
Attach the actual repayment schedules and explain each adjustment. The working capital guide addresses a separate question: whether cash arrives before payments are due. An annual quotient does not show that timing.
Common mistakes
Do not deduct the same clinical expense twice, use monthly debt against annual cash, or present a proposed refinancing payment as already agreed. The SBA acquisition guide contains a separate dated program example; its assumptions should not be imported into this worksheet.
Summary
Resolve the $50,000 numerator change and $20,000 denominator change before debating the headline ratios. Keep the three rows so another reader can reproduce the bridge. Then take the agreed inputs and unresolved differences to a financing discussion.
Frequently asked questions
Why does coverage fall from 1.67 to 1.07?
The invented bridge deducts $50,000 of supplied cash needs and adds $20,000 of annual debt payments. The underlying operating surplus is unchanged.
Is 1.15 an approval threshold here?
No. It is the rounded result of $150,000 divided by $130,000 in an independent scenario.
Does the example define a lender's EBITDA?
No. Its opening surplus and cash deductions are supplied worksheet assumptions, not a lender formula.
Does the annual ratio prove each bill can be paid on time?
No. The model removes receipt timing differences. Review dated cash receipts and outflows separately.
Sources
Retrieval dates appear beside each source. Figures retain their stated observation years; retrieval does not make older data current.
- BDC ratio definitions · Retrieved
- Chase ratio explanation · Retrieved