Borrowers usually ask how much they can borrow. Lenders ask what the cash flow can service. This sets out the calculation that governs the answer, and the four levers that actually move it.
The question lenders are actually answering
Borrowers ask how much they can borrow. Credit committees ask a different question: what can the cash flow service, with a margin of safety? The ratio that carries that question is the debt service coverage ratio, and if you understand how it is built you can predict the sanction amount before anyone runs an appraisal.
The calculation
DSCR is cash available for debt service divided by the debt service falling due in the same period.
The numerator starts at EBITDA and deducts two things. Cash tax, because tax is paid before lenders. Maintenance capex, because a lender will not allow the asset base to run down in order to service a loan, the equipment that generates the cash has to be kept serviceable. Some lenders make further adjustments, and a negotiation over what counts as maintenance rather than growth capex is common and worth having.
The denominator is interest plus scheduled principal repayment for the year. Note that it is principal repayment, not principal outstanding: a loan with a longer tenor has the same interest profile but a much smaller principal charge each year, which is why tenor moves DSCR so effectively.
What lenders require
Most Indian term sheets we see require an average DSCR between 1.25 and 1.50 over the loan tenor, with a separate floor on the minimum in any single year. The minimum is usually the binding constraint, because it lands in the first two years after a project commissions, when capacity utilisation is still ramping and the full principal instalment has already begun.
A projection that averages 1.6 but dips to 0.9 in year two will not be sanctioned in that form. It will be restructured, a moratorium, a step-up repayment profile, or a smaller loan.
Why a multiple of EBITDA is not a sizing method
Rules of thumb like "three times EBITDA" circulate widely and are worse than useless for sizing, because they contain no interest rate and no tenor. Take a business with ₹15 crore of EBITDA and test the same three-times loan of ₹45 crore at different terms:
| Rate | Tenor | Annual debt service | DSCR on EBITDA |
|---|---|---|---|
| 9% | 7 years | ₹8.69 Cr | 1.73 |
| 9% | 5 years | ₹11.21 Cr | 1.34 |
| 11% | 5 years | ₹11.74 Cr | 1.28 |
| 13% | 5 years | ₹12.29 Cr | 1.22 |
The same leverage multiple spans comfortably serviceable to marginal purely on terms. And every figure in the right-hand column is computed on EBITDA, deduct cash tax and maintenance capex and each falls further, in most cases below what a lender would accept.
The four levers
- Tenor. The most powerful lever. Extending a term loan from five to seven years can move DSCR by 0.3 or more at the same quantum.
- Moratorium. Aligning the start of principal repayment to commissioning prevents a first-year breach. Where interest is capitalised rather than serviced, the principal you eventually repay is higher, our EMI tool shows the effect explicitly.
- Repayment profile. A ballooning schedule that steps up as the plant ramps is frequently accepted where a straight-line schedule is not.
- Quantum. Reducing the loan and bringing more promoter contribution is the lever of last resort, and the one lenders reach for if the others are exhausted.
Working backwards to the loan amount
If you know your cash available for debt service and the DSCR the lender will require, you can invert the calculation. Divide cash available by the target DSCR to get the annual debt service you can afford, subtract the debt service on facilities you already carry, and discount the remainder at the expected rate over the expected tenor. That gives you the principal.
A business with ₹5 crore of EBITDA, ₹90 lakh of cash tax and ₹60 lakh of maintenance capex has ₹3.5 crore available. At a target DSCR of 1.4 that supports ₹2.5 crore of annual debt service, which at 10.5% over seven years discounts to roughly ₹12.4 crore of term debt. That is a defensible number to take into a conversation, and it is 2.5 times EBITDA rather than the three times a rule of thumb would have suggested.
What the ratio does not capture
- Working capital absorption. A business growing 30% a year absorbs cash into receivables and inventory. That cash is not available for debt service, and a DSCR computed off EBITDA alone will overstate capacity.
- Seasonality. An annual ratio can look comfortable while the business cannot meet a quarterly instalment in its lean quarter.
- Refinancing risk. A bullet or balloon repayment shows a healthy DSCR in every year until the year it does not.
Run your own numbers
Our debt capacity calculator does the inversion above: enter EBITDA, tax, maintenance capex, existing debt service, rate, tenor and target DSCR, and it returns the incremental term debt your cash flow supports, together with the resulting leverage as a cross-check. See also our page on project and term finance.
This article is general information, not lending, tax or legal advice. Statutory positions and lender practice change. See our terms of use, and talk to our team for advice on your own situation.