Coverage ratios, and how lenders decide what you can carry.

Start here: the ratios themselves

DSCR is the headline ratio and the one most owners have heard of. FCCR is its stricter cousin, and in practice it is usually the one that binds, because it counts obligations that are just as unavoidable as debt service without being debt.

• DSCR vs FCCR: Formulas and Which One Binds
  DSCR measures debt service. FCCR adds rent, capex, taxes, and distributions. The difference, both formulas, and why FCCR usually binds first.

The inputs, and why they are the real argument

The ratio is arithmetic. The earnings figure feeding it is a negotiation. Which addbacks survive diligence, how a normalised run rate is built, and what a quality-of-earnings review strips out will move your coverage more than any structural change to the facility.

• Addbacks That Survive Diligence vs. Addbacks That Don't
  Every seller adds back expenses to make EBITDA look bigger. Some of those addbacks are legitimate and survive a buyer's accountant; others vanish under scrutiny and take the price down with them. Here's the line between the two, whether you're buying or being bought.
• Pro Forma EBITDA vs Adjusted EBITDA: Underwriting a Company That Doesn't Exist Yet
  When you buy a business, the lender has to size debt against a combined entity that has never filed a tax return. That number, pro forma EBITDA, is where deals are quietly won and lost. Here's how a credit team builds it, and which of your assumptions they'll throw out.
• Quality of Earnings: What a QoE Review Finds
  Where reported profit meets reality, and where signed deals most often die. What a QoE review tests, and which addbacks survive it.
• What Underwriters Actually Look for in Your Bank Statements
  Non-bank lenders decide most working-capital deals off 3–6 months of bank statements. Here are the exact signals they scan for, deposit consistency, NSF days, balance floors, and how each one moves your offer.

Where coverage becomes a covenant

A ratio calculated once at closing is a screening test. A ratio written into the credit agreement is a continuing obligation you can breach. Understanding how the test is defined, measured and cured matters more than the headline number.

• Loan Covenants Explained: Meaning, Examples, and Types
  What loan covenants are, the three types lenders use, common financial covenant examples, what happens when you breach one, and how much headroom to hold.
• Term Sheet Anatomy: Every Clause, Translated
  A term sheet is short, dense, and written in a dialect most borrowers only encounter once. Here's a clause-by-clause translation, facility size, pricing, fees, covenants, borrowing base, guarantees, and the provisions that decide what happens when things go wrong.
• Unitranche vs Senior vs Mezzanine Debt: The Capital Stack Explained
  Every financing conversation assumes you know where each layer sits, what it costs, and who gets paid first. Here's the whole stack explained once, seniority, security, pricing logic, intercreditor mechanics, and where each layer actually fits.

When coverage is the reason for a decline

Thin coverage is one of the most common reasons a credible business gets turned down by its own bank, and one of the least well explained at the time.

• Business Loan Declined: The Real Reasons Banks Say No After 14 Years
  The decline usually has nothing to do with your relationship, your banker, or even your numbers. Here's what actually happens inside a bank between your request and the answer, why long-standing customers get declined, and what to do the week you find out.
• Personal Guarantees: What You're Signing
  Unlimited, limited, joint and several, springing, validity. What each guarantee obligates you to, and what survives the business itself.

Run the numbers

Tools for this topic. Everything runs in your browser, free and without signup.

• DSCR & FCCR Calculator
  Coverage ratios with capex, taxes, distributions and rent, and which covenant binds first.
• Covenant Headroom Calculator
  Leverage, coverage and minimum EBITDA tests, showing which one binds and by how much.

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