The debt service coverage ratio (DSCR) divides cash flow, usually EBITDA with approved add-backs, by scheduled principal and interest. The fixed charge coverage ratio (FCCR) first subtracts cash the business spends before any lender is paid, typically unfinanced capital spending, cash taxes and distributions to owners, and sometimes adds rent to the charges. The same company can pass a DSCR test comfortably and fail an FCCR test. Banks and SBA lenders mostly use DSCR; asset-based and many private credit lenders use FCCR, which is usually the tighter test for businesses with heavy capex or owner distributions.
- DSCR
- Cash flow ÷ scheduled principal and interest
- FCCR
- Cash flow after capex, taxes and distributions ÷ fixed charges
- Usually tighter
- FCCR, because more comes out of the top line
- Who tests DSCR
- Banks and SBA lenders, most often
- Who tests FCCR
- Asset-based lenders and many private credit funds
- What decides it
- The definitions in your credit agreement
Two ratios, one question
Both ratios ask whether the business generates enough cash to meet its obligations to lenders, with room to spare. The difference is how honest each one is about cash that leaves the business first.
The debt service coverage ratio, in its most common form, is EBITDA divided by the principal and interest due over the same period. It treats everything above the line as available to lenders. The fixed charge coverage ratio starts from the same EBITDA but takes out the money a real business cannot avoid spending or paying out: capital expenditure it did not finance, taxes paid in cash, and distributions or dividends to owners. It divides what remains by fixed charges, which are principal and interest and, in some agreements, rent and lease payments.
There is no single legal definition of either ratio. The words "DSCR" or "FCCR" in a term sheet mean whatever the credit agreement's definitions say, and those definitions are negotiable.
Line by line: what each ratio counts
| Item | In a typical DSCR | In a typical FCCR |
|---|---|---|
| Starting point | EBITDA, with documented add-backs | The same EBITDA |
| Capital expenditure | Usually ignored; some banks deduct maintenance capex | Unfinanced capex deducted; capex funded by a loan or equity usually excluded |
| Cash taxes | Deducted where a bank starts from net income and adds back interest, depreciation and amortization; ignored where it starts from EBITDA | Deducted |
| Owner distributions and dividends | Often ignored; some banks deduct them | Deducted, sometimes excluding tax distributions |
| Rent | Already an expense above EBITDA | Some agreements add rent back to cash flow and add it to the charges |
| Scheduled principal | In the denominator | In the denominator |
| Interest | In the denominator | In the denominator |
| Revolver | Interest only; principal repayments are not scheduled | Interest only |
| Seller note payments | Included if the note pays currently | Included if the note pays currently |
| Owner's salary | A market salary is deducted in acquisition underwriting | Same treatment, through the EBITDA definition |
Two lines deserve a closer look. Capex is the biggest swing: a manufacturer or trucking company can spend a large share of its EBITDA on equipment every year just to stand still, and FCCR sees that while a simple DSCR does not. Whether the spending counts depends on whether it is maintenance or growth, and on whether it was financed; see maintenance vs growth capex. Distributions are the other: in a pass-through company, owners take money out to pay the personal tax on the company's income, and FCCR treats that as cash gone unless the definition carves out tax distributions. See tax distributions under a loan.
A company that passes one and fails the other
Take a distribution business with EBITDA of 1,500. Over the same twelve months it spends 300 on trucks and warehouse equipment from its own cash, pays 100 in cash taxes, and distributes 250 to its owners. Its term loan requires 700 of principal and 300 of interest: fixed charges of 1,000.
| DSCR | FCCR | |
|---|---|---|
| EBITDA | 1,500 | 1,500 |
| Less unfinanced capex | Not deducted | 300 |
| Less cash taxes | Not deducted | 100 |
| Less distributions | Not deducted | 250 |
| Cash flow available | 1,500 | 850 |
| Principal and interest | 1,000 | 1,000 |
| Ratio | 1.5 times | 0.85 times |
| Result | Passes a 1.25x test | Fails any test set above one |
On DSCR, the company looks strong: it earns one and a half times its loan payments, above the 1.25x that conventional bank lenders commonly look for. On FCCR, it does not cover its fixed charges at all. Both are true. The DSCR describes what the business could pay if it stopped buying equipment and stopped paying its owners; the FCCR describes what it actually has left after doing both.
The same company can fix its FCCR without earning a cent more. The choices, and what each does to the ratio:
| Change | Cash flow available | Fixed charges | FCCR |
|---|---|---|---|
| As above | 850 | 1,000 | 0.85 times |
| Finance the equipment with a loan costing 80 a year | 1,150 | 1,080 | About 1.06 times |
| Limit distributions to 100 for taxes | 1,000 | 1,000 | 1.0 times |
| Both | 1,300 | 1,080 | About 1.2 times |
This is why FCCR is usually the tighter test for businesses with heavy capex or owner distributions, and why the fix is usually about definitions and habits rather than growth: how capex is funded, what counts as a permitted distribution, and when in the year each happens.
Which test your lender is likely to use
| Lender | Usual coverage test | How it is used |
|---|---|---|
| SBA 7(a) lender | DSCR | At underwriting: at least 1.15x, and 1.0x globally including the owners; from 1 October 2026 a change of ownership must show 1.25x on historical results. Ongoing tests, if any, are usually annual. |
| Bank, conventional term loan | DSCR | Commonly underwritten to at least 1.25x; tested annually or quarterly. Some banks' DSCR deducts taxes and distributions, which makes it an FCCR by another name. |
| Asset-based lender | FCCR | Usually springing: tested only when excess availability falls below a threshold. |
| Private credit fund or unitranche | FCCR, beside maximum leverage | Tested quarterly on trailing twelve months, often with levels that tighten over time. |
| Mezzanine or second lien | The senior lender's test, set looser | So the senior lender sees a breach first. |
For an SBA or bank loan, the coverage test mostly shapes how much you can borrow at the start. For an asset-based or private credit loan, it more often shapes whether you stay in compliance every quarter afterward. The difference between a test at approval and a test every quarter is covered in maintenance vs incurrence covenants.
The definitions worth negotiating
- Financed capex excluded. Capex paid for with an equipment loan, lease or new equity should not also be deducted from cash flow; the loan payments already appear in the charges.
- Maintenance capex only. Growth spending, such as a new line or a second location, is a choice; some lenders agree to deduct only maintenance spending, or a fixed amount.
- Tax distributions carved out, or at least deducted only to the extent of taxes actually due on the company's income.
- Rent treatment. Adding rent to both sides lowers the ratio for any business that covers its charges more than once, so check whether the covenant level was set with rent in or out.
- Add-backs in EBITDA: one-time costs, owner pay above a market salary, acquisition costs. See the covenant EBITDA definition.
- Test period: trailing twelve months rather than a single quarter annualized, so one lumpy capex quarter does not trip the test.
Each of these is easier to settle in the term sheet than after the loan closes. A covenant level is only meaningful beside the definition it is applied to, so compare offers on both. Our page on covenant headroom shows how to measure cushion in EBITDA rather than in ratio points.
Managing to the tighter test
If your loan carries an FCCR covenant, run it monthly on a trailing basis, not just when the compliance certificate is due. The items that move it most, capex and distributions, are the ones management decides. Financing a large equipment purchase rather than paying cash (see equipment financing vs SBA 7(a)), and sizing each distribution only after the quarter's results and the next test are known, can keep a business in compliance through a year that was never in danger on a DSCR basis. Timing alone helps less than owners expect: on a trailing twelve-month test, a purchase made just after one test date still counts against the next four.
When Transparent builds a lender package, the financing model shows both ratios on the lender's own definitions, so an owner can see before signing which test is the binding one. Once the documents are in, that package is built in a day.
Common questions
- Is FCCR always lower than DSCR?
- Usually, but not always. If a business has no unfinanced capex, pays no cash taxes and makes no distributions, the two can be equal. Where rent is added to both cash flow and charges, the FCCR moves toward one, which lowers it for a healthy business and raises it for a weak one.
- What FCCR do lenders require?
- It varies by lender and by how the ratio is defined, and a level means little without its definition. Any FCCR below one means the business did not cover its fixed charges from what it had left after capex, taxes and distributions.
- Do SBA lenders use FCCR?
- SBA's rules are written in terms of debt service coverage: at least 1.15x, 1.0x globally including the owners, and from 1 October 2026 at least 1.25x on historical results for a change of ownership. Some SBA lenders deduct distributions or capex in their own calculation, which brings it closer to an FCCR.
- Does my salary count against either ratio?
- In acquisition underwriting, lenders deduct a market salary for whoever runs the business before testing either ratio. Pay above that level is usually treated as a distribution, which FCCR deducts. See the buyer's salary in acquisition DSCR.
- Are seller note payments included in fixed charges?
- If the note pays principal or interest during the test period, yes, in both ratios. A seller note on full standby pays nothing, so it does not appear in either.