What is Debt Service Coverage Ratio, and why is it important?
The Debt Service Coverage Ratio (DSCR) is a financial metric used to assess a borrower's ability to repay its debt obligations. It is calculated by dividing a company's annual net operating income (NOI) by its annual debt service, which is the total amount of principal and interest payments due on its debt obligations in a given year.
Lenders commonly use the DSCR to assess the creditworthiness of a borrower, particularly in the context of real estate financing. A high DSCR, typically above 1.2, indicates that a borrower has strong cash flows and is able to meet its debt obligations comfortably. A low DSCR, on the other hand, suggests that a borrower may struggle to repay its debt obligations and may be at a higher risk of default.
In general, lenders prefer to lend to borrowers with a high DSCR, as it provides assurance that the borrower will be able to repay the loan on time. Lenders may also use the DSCR to determine the loan-to-value (LTV) ratio and to evaluate the borrower's ability to repay the loan in the event of an economic downturn or other adverse circumstances.
It is important for borrowers to understand the DSCR and to take steps to improve it, as a high DSCR can increase their chances of securing financing and may also help to negotiate better loan terms. This may involve improving their cash flows, reducing their debt obligations, or both. This can be achieved by involving a local corporate debt advisory company that can guide a company to take the steps which are vital for increasing a company's DSCR
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Amnacapital (corporate debt advisory service based in the UAE) can advise SMEs and corporates on steps to take in order to increase their DSCR. amnacapital knows what lenders in their network are looking for and how a harmonious relationship can be built between a borrower and a lender.
amnacapital structures various trade facilities for its clients and has local and international lenders in its pool. amnacapital understands what it takes and what are the most beneficial services a company can avail with respect to its current financial status and requirement.
With the help of an experienced and knowledgeable team from amnacapital - an SME or an emerging corporate can be confident of securing a debt at better terms from one or the other lenders from the local and international market. Finding a direct funder costs a lot of energy, effort, and time for a company and this doesn't always end in receiving the financial assistance needed.