You are reading the financial covenants section of your term sheet. One of the conditions is the Debt service coverage ratio covenant. Here is what it measures, why the bank includes it, and what to check before you sign.
What the bank is measuring
A DSCR measures operating cash flow relative to total debt service (principal repayments + interest). It tests whether cash generation covers all debt payments.
What this means: Unlike ICR (interest only), DSCR includes principal repayment. This is a stricter test — you need enough cash flow to cover both interest and amortization.
What to check
Principal repayment schedule: bullet vs. linear amortization affects the denominator significantly
Cash flow timing: annual DSCR may mask quarterly cash shortfalls
CapEx-heavy periods can temporarily reduce operating cash flow
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Debt service coverage ratio covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.
What to do next
The fastest way to see whether a Debt service coverage ratio covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
Analyse your term sheetFrequently asked questions
What is a Debt service coverage ratio covenant?
A DSCR measures operating cash flow relative to total debt service (principal repayments + interest). It tests whether cash generation covers all debt payments.
What happens if you breach a Debt service coverage ratio covenant?
Unlike ICR (interest only), DSCR includes principal repayment. This is a stricter test — you need enough cash flow to cover both interest and amortization.
Can you negotiate a Debt service coverage ratio covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Debt service coverage ratio covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.