Nearly 60% of restaurant loan applications get rejected due to poor debt service coverage ratios. This crucial metric reveals if your establishment generates sufficient cash to handle loan repayments. Banks typically demand a DSCR of 1.2 or higher before approving restaurant financing.
What is the debt service coverage ratio?
The debt service coverage ratio measures your operating cashflow against annual debt payments. It shows how many times over you can cover loan obligations with current earnings.
? Example:
Restaurant De Smaak has:
- Operating cashflow: €120,000 per year
- Mortgage payments: €60,000 per year
- Other loans: €20,000 per year
DSCR: €120,000 / €80,000 = 1.5
The DSCR formula
DSCR = Operating Cashflow / Total Annual Debt Obligations
Operating cashflow equals your EBITDA (earnings before interest, taxes, depreciation, and amortization). Calculate this by adding back to net profit:
- Interest expenses
- Taxes
- Depreciation
- Amortization
Step 1: Calculate your operating cashflow
Start with net profit from your P&L statement. Then add back all non-cash expenses and financing costs:
? Example calculation:
Bistro Het Plein:
- Net profit: €45,000
- Interest expenses: €18,000
- Taxes: €12,000
- Depreciation: €25,000
Operating cashflow: €100,000
Step 2: Add up all debt obligations
Total every annual payment obligation, covering both interest and principal:
- Mortgage or rent-to-own payments (monthly × 12)
- Bank loans (complete repayments plus interest)
- Equipment lease obligations
- Alternative financing arrangements
⚠️ Note:
Use total payments, not just interest portions. Principal repayments represent actual cash leaving your business.
Step 3: Calculate the ratio
Divide operating cashflow by total annual debt obligations. This shows how many times you can service your debts. I've seen restaurants miscalculate this step—a mistake that costs the average restaurant EUR 200-400 per month in unnecessary interest from poor loan terms.
? Complete calculation:
Restaurant Milano:
- Operating cashflow: €150,000
- Mortgage: €72,000 per year
- Equipment loan: €24,000 per year
- Total debt: €96,000
DSCR: €150,000 / €96,000 = 1.56
What do the numbers mean?
Lenders and investors interpret your DSCR this way:
- Below 1.0: High risk - earnings fall short of debt costs
- 1.0 - 1.2: Danger zone - minimal cushion for downturns
- 1.2 - 1.5: Acceptable range - meets most lending standards
- Above 1.5: Strong position - excellent creditworthiness
Improve your DSCR
For ratios that need work, consider these approaches:
- Boosting operating cashflow (higher revenue, reduced expenses)
- Renegotiating debt terms (extended periods, smaller monthly amounts)
- Postponing new borrowing until ratios strengthen
Food cost management systems provide clearer visibility into actual expenses and profit margins, supporting stronger operating cashflow.
Related articles
How do you calculate the debt service coverage ratio? (step by step)
Determine your operating cashflow (EBITDA)
Start with your net profit and add interest, tax, depreciation and amortization. This gives you cashflow before debt obligations.
Add up all annual debt obligations
Include mortgage, loans, lease and other financing. Calculate the total amount including both interest and principal repayment.
Divide cashflow by debt obligations
The result shows how many times you can pay back your debts. A ratio of 1.2 or higher is considered healthy.
✨ Pro tip
Review your DSCR monthly using trailing twelve-month data to spot concerning trends early. This proactive monitoring strengthens your position for refinancing negotiations and prevents emergency loan situations.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
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Frequently asked questions
What DSCR do banks require for restaurant loans?
Should lease payments be included in debt obligations?
How do seasonal restaurants calculate DSCR accurately?
What happens if my DSCR drops below 1.0 mid-year?
Do credit card balances affect my DSCR calculation?
Can I exclude depreciation from operating cashflow calculations?
How often should established restaurants recalculate DSCR?
Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
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