Your Lender Ran Your DSCR. Here's What the Number Actually Means.

I got a call from a general contractor in Cypress last fall. He’d just walked out of Frost Bank with his tail between his legs. He needed $250,000 for a boom lift and a commercial job that would’ve doubled his revenue. Three years in business. Clean credit. Never missed a payment on anything. He thought approval was automatic.

The loan officer handed him back a single number: 0.95.

His DSCR was below 1.0. Denied.

He had no idea what DSCR even stood for. Never heard the term before. He was furious, convinced the banks had it out for small business owners. I sat down with him that week and explained what happened. It wasn’t the system rigging anything. His books told a story that didn’t match his actual business. Nobody had walked him through what the bank was seeing.

What DSCR Actually Measures

DSCR stands for Debt-Service Coverage Ratio. It’s the metric every bank looks at first. It answers one question: does your business make enough money to pay back the loan?

DSCR = Net Operating Income / Total Annual Debt Payments

Net operating income is what you take in minus what you spend to run the business. Before taxes, interest, depreciation, amortization. Some banks use EBITDA. Some tweak it slightly. The point is always the same. How much cash is your business actually producing compared to how much you owe?

A ratio of 1.0 means you earn just enough to cover your debt payments. Nothing left over. A ratio of 1.25 means you earn 25 percent more than required. A ratio of 0.95 means you fall short. The bank sees a business that can’t cover its obligations from operations. That’s a problem.

What Happened to My Client

Here’s what his books looked like when he walked into the bank:

Line Item	Amount
Annual Revenue	$820,000
Operating Expenses	$685,000
Net Operating Income	$135,000
Existing truck loan (annual)	$18,000
Proposed SBA loan payment (annual)	$42,000
Equipment lease (annual)	$12,000
Line of credit minimum (annual)	$9,600
Small equipment loan (annual)	$6,000
Total Annual Debt Service	$87,600
Credit card debt payments (annual)	$14,400
Total with All Obligations	$142,000

The bank divided net operating income by total debt service:

$135,000 / $142,000 = 0.95

He was 5 percent short. His business couldn’t cover everything on paper.

Here’s the thing. His operating expenses included $42,000 in owner draws that he’d labeled “consulting fees.” They also included $8,500 in personal meals and entertainment. His wife’s car payment, $7,200 a year, was running through the business checking account.

None of that is a real operating expense. When I reclassified everything correctly, his operating expenses dropped to $627,300. His net operating income jumped to $192,700.

New DSCR: $192,700 / $142,000 = 1.36

Way above the SBA minimum of 1.15 to 1.25. Same business. Same revenue. Same debts. Different bookkeeping. The loan got approved on the second application.

What Different Lenders Actually Require

Every loan type has its own DSCR floor:

Loan Type	Typical Minimum DSCR	Common Houston Lenders
SBA 7(a)	1.15 to 1.25	Frost Bank, Comerica, Cadence Bank, Wells Fargo
SBA 504 (real estate/equipment)	1.20 to 1.35	Frost, Capital One, Independent Financial
Commercial Real Estate	1.20 to 1.50	Cadence, Veritex, Texas Capital Bank
Equipment Financing	1.10 to 1.25	Balboa Capital, CIT, Frost
Working Capital Line	1.00 to 1.20	Chase, Frost, Comerica

These aren’t hard lines. A strong personal guarantee, good collateral, or a long relationship with the bank can move the needle. But DSCR is always the first thing they look at. It’s the first number the loan officer checks. Below threshold, and you’re fighting uphill.

I work with lenders all over Houston. Frost, Cadence, the smaller community banks down Spring Branch. The SBA Houston District processes thousands of applications every year. The number one reason for denial isn’t bad credit or missing collateral. It’s cash flow that doesn’t show on the financials. The business isn’t dying. The books just aren’t telling the real story.

Why the Number Is Often Wrong

The contractor in Cypress didn’t need more revenue. He needed a bookkeeper. And that’s the problem I see most often with Houston business owners applying for loans.

Owner Compensation Hiding as Expenses

A lot of sole proprietors and single-member LLC owners pay themselves by moving money from the business and calling it an expense. Management fees. Consulting. Miscellaneous. Pick a label.

Every dollar of owner compensation you bury in operating expenses reduces your reported net operating income. That directly tanks your DSCR. Take $5,000 a month in draws coded as expenses, that’s $60,000 a year of artificially low income on the books.

Lenders know this happens. Some of them add owner compensation back in. Most don’t. They take your financials as presented. Clean books that separate owner draws from real operating expenses show the accurate picture. No guessing.

Personal Expenses Running Through Business Accounts

His wife’s car. Personal meals out. Amazon purchases. Home internet. Cell phone where you don’t track personal versus business use.

Every personal expense that hits the business account inflates your costs and crushes your NOI. I’ve fixed files for Houston business owners with $15,000 to $30,000 a year in personal expenses mixed in. That’s the difference between 1.0 DSCR and 1.25 DSCR. The difference between no and yes on a loan application.

Depreciation and Amortization Issues

Some businesses claim aggressive depreciation deductions. Section 179, bonus depreciation. You buy $80,000 in equipment, deduct the whole thing year one, your tax return shows $80,000 less income.

But banks add depreciation back when they calculate DSCR. Depreciation isn’t cash. You still generated that cash. You just claimed a tax deduction for buying equipment. A lender looking at your tax return without adding that back sees a much weaker business than actually exists.

This is where a bookkeeper who understands lending matters. The financials I send to banks show EBITDA cleanly, with depreciation and amortization listed out separately. No digging required.

Inconsistent or Incomplete Records

Lenders want two to three years of financial statements. Month one detailed. Month two a summary. Month three a QuickBooks printout with unreconciled accounts. The lender sees red flags. Even if the numbers are fine, inconsistency signals risk.

Monthly reconciliation and monthly closes show the kind of financial discipline lenders respect. Not because the numbers are necessarily bigger, but because consistency proves you know what’s happening in your business.

How to Fix Your DSCR Before Applying

Fix your DSCR six to twelve months before you walk into a bank. Not the week before.

Clean Up Your Books

Reclassify the owner draws. Strip out personal expenses. Separate one-time costs from operations. This move alone can jump your ratio by 0.2 to 0.4 points.

I had a Heights restaurant owner whose DSCR went from 1.08 to 1.42 just by fixing misclassified transactions. No new revenue. No debt paydown. Just correct categorization. It worked.

Reduce Existing Debt

Pay off a small equipment loan or credit card balance before you apply. That removes the payment from the denominator. A $500 monthly payment is $6,000 a year in debt service eliminated.

I had a Midtown retail owner pay off two credit cards, $12,000 total, three months before her SBA application. Her DSCR went up 0.18 points. That’s the difference between no and yes.

Increase Net Operating Income

It’s harder than it sounds, but even small revenue increases or expense cuts move the needle. A 5 percent jump on $800,000 in sales is $40,000 gross. That might be $25,000 to $30,000 in additional NOI after variable costs.

I had an Energy Corridor consultant raise his rates 8 percent across the board six months before applying for a line of credit. His NOI went up $38,000. His DSCR went from 1.12 to 1.31.

Time Your Application

If Q3 and Q4 are your best quarters (common for construction and retail in Houston), apply in January when you’ve got a full year of strong performance behind you. Don’t apply in July when Q1’s weak numbers are still dragging down your average.

I had a different Cypress contractor wait four months to apply because January and February had been slow. By waiting, his trailing twelve months showed a full year of strong work. His DSCR went up 0.22 points just from timing.

Present a Clear, Lender-Ready Financial Package

Three years of monthly financial statements. A current balance sheet. An aging report on accounts receivable. A complete debt schedule with payment amounts and remaining terms. One page explaining any oddities.

Banks don’t deny loans because they like saying no. They deny loans because the financial story is murky, incomplete, or shows a business that can’t cover the debt. A clear story wins half the battle.

The Number Behind the Number

DSCR is a ratio. It’s not a judgment call. A DSCR of 0.95 doesn’t mean your business is broken. It means your financial statements don’t show enough breathing room.

The contractor in Cypress had the revenue. He had the clients. He had pipeline. What he didn’t have was books that reflected what his business actually produced. Once I cleaned up the bookkeeping and restated the financials, his DSCR went from 0.95 to 1.36. The loan got approved on the second application.

The difference wasn’t his business. It was his books.

I’ve been doing this for years all over Houston. The Galleria, Heights, Midtown, Energy Corridor, Cypress. The neighborhoods change but the problem stays the same. I clean up financials and build lender-ready packages that show the real story. Schedule a consultation before you walk into your next bank meeting.