Wednesday, July 18, 2018

Debt Service Ratio

Term Definition
Debt Service Ratio

The ratio comparing the borrower's income (or any other chosen measure of ability to pay) with loan payment obligations ("debt service"). Typically lenders insist that a company maintain a certain debt service coverage ratio, also called debt coverage ratio. The credit agreement may impose penalties for failure to meet the minimum ratio. The higher the debt service ratio, in general the ability of the business to pay the debt service costs and expenses is greater. A ratio that is high, like 10:1, indicates an excellent ability to repay the debt.  Also called the Debt Coverage Ratio or the Debt Service Coverage Ratio.