In general, DSCR is based on two numerical factors: one or greater and less than one. If the variable is one or greater, the business has enough cash flow to cover the principal and interest on the loan.
If the number is less than one, the borrower has negative cash flow and isn't able to repay the loan without borrowing money from another source.
If a business's DSCR is 1.55, the lender determines they have enough cash flow to cover current debt obligations and repayment of the loan they're applying for.
If the debt service coverage ratio is 0.90, the lender determines the company doesn't have enough cash flow to repay the loan. In other words, the business only has 90% of the funds needed for repayment.
Yet, if the lender knows the company has strong outside resources, they could allow a negative DSCR to pass approval.
If the number is too close to 1, like 1.20, the loan officer could consider it "vulnerable." This means if there's a reduction in a business's cash flow, it's possible the debt won't get paid.