A dental practice debt service coverage ratio compares a lender-defined amount available for repayment with the required debt service for the same testing period. Obtain the lender's written definitions before calculating it. A familiar label such as “cash flow” does not tell you which owner payments, adjustments, or obligations belong in the test.
DSCR = lender-defined repayment capacity ÷ included principal and interest payments.
Commerce Bank describes an EBITDA-based calculation and separate business, personal, and combined assessments. EBITDA means earnings before interest, taxes, depreciation, and amortization. That is one lender's explanation, not permission to substitute EBITDA for a different definition in your agreement. Commerce Bank's explanation of DSCR
Turn the loan language into a calculation sheet
Ask the lender and your accountant to complete a definition sheet together. For an existing loan, identify the executed agreement, amendments, and exact covenant section. For a proposed loan, label terms as proposed until documented.
| Definition | Question to resolve |
|---|---|
| Borrower boundary | Practice alone, related entities, guarantors, or another specified group? |
| Testing period | Fiscal year, trailing twelve months, quarter, or an agreed projection? |
| Starting earnings | Which statement, accounting basis, and exact income line? |
| Adjustments | Which additions and deductions are allowed, required, capped, or conditional? |
| Debt service | Which obligations, payment periods, leases, and maturity amounts count? |
| Required coverage | What ratio applies, on which dates, and using what rounding convention? |
| Reporting | Who prepares, reviews, signs, and delivers the calculation? |
Separate the loan's initial underwriting test from its ongoing covenant. They may use different periods or assumptions. Save any interpretation with the calculation; a verbal answer should remain an unresolved item until the responsible parties confirm how it applies.
Use the dental practice loan comparison when selecting financing. This worksheet establishes how one particular repayment test works after the terms are identified.
Reconcile earnings one adjustment at a time
Start with a financial statement that the accountant can trace to the books. Show every adjustment as its own line, with its sign, amount, supporting record, and basis in the lender's definition.
For an interest add-back, confirm that the starting earnings already include the expense. Adding back an expense never deducted would overstate coverage. Apply the same check to depreciation, amortization, and any income-tax expense.
Do not treat “one-time” as an automatic allowance. Identify the transaction, why it is nonrecurring, and whether the lender accepts it. A future hoped-for saving is different from an expense already recorded. Keep requested adjustments separate from accepted ones.
Owner labor deserves a specific reconciliation. If the calculation substitutes a reviewed labor allowance for compensation already recorded, show both movements. If the agreement deducts distributions or personal obligations, follow that definition without deducting the same cash requirement twice. Have the accountant resolve the entity and payment classifications.
An earnings-based numerator is not a bank balance. The SEC distinguishes earnings from cash flows and explains that noncash adjustments and financing transactions affect those reports differently. SEC guide to financial statements
Build the denominator from payment schedules
List each included loan separately. Record the required principal and interest during the exact test period, using lender statements and amortization schedules. Reconcile the total to the agreements rather than multiplying a recent payment by twelve without checking for changes.
Examine payment starts, rate resets, interest-only periods, balloons, seller obligations, and revolving balances. Ask how the test treats leases and contingent obligations. An obligation can matter to the broader cash plan even when this particular covenant excludes it.
For a forward-looking scenario, use the payment amounts expected under the actual terms and label uncertain rates. For a historical test, use the prescribed historical basis. Do not divide annual earnings by one month's payment or compare last year's earnings with an unexplained future debt total.
If included debt service is zero, report that there is no finite ratio to calculate under this formula. Show the numerator and zero denominator instead of displaying a misleading percentage.
Work through a complete hypothetical test
Assume a fictional agreement requires annual practice-only coverage of 1.25 times. The lender has accepted the following definitions and adjustments for this example. The threshold and amounts are illustrative, not approval standards or recommended add-backs.
| Numerator reconciliation | Amount |
|---|---|
| Reported net income | $210,000 |
| Interest expense already deducted | +$36,000 |
| Depreciation and amortization already deducted | +$44,000 |
| Accepted nonrecurring adjustment | +$10,000 |
| Additional deduction required by this fictional agreement | −$30,000 |
| Defined repayment capacity | $270,000 |
Assume no income-tax expense is included in the starting earnings and no other adjustment applies. The $30,000 deduction is an example-specific lender requirement supported separately; readers should not copy it into their own formula.
| Included obligation | Annual principal | Annual interest | Debt service |
|---|---|---|---|
| Practice loan | $150,000 | $30,000 | $180,000 |
| Equipment loan | $24,000 | $6,000 | $30,000 |
| Total | $174,000 | $36,000 | $210,000 |
Coverage is $270,000 ÷ $210,000 = 1.2857 times, or 1.29 rounded for display. Retain the unrounded result when applying the agreement's test.
At 1.25 times, required repayment capacity is $262,500. The amount above that requirement is therefore $7,500, calculated as $270,000 − $262,500. That is the room in this ratio, not cash available for distribution.
Test what could use that room
Change one assumption at a time, then combine them:
| Hypothetical case | Numerator | Debt service | DSCR, rounded |
|---|---|---|---|
| Original test | $270,000 | $210,000 | 1.29 |
| Repayment capacity falls $30,000 | $240,000 | $210,000 | 1.14 |
| Debt service rises $15,000 | $270,000 | $225,000 | 1.20 |
| Both changes occur | $240,000 | $225,000 | 1.07 |
All three changed cases fall below the fictional 1.25 requirement. Each needs an explanation tied to the actual source: lower earnings, a rate change, or another supported event. Reclassifying an expense without contractual support does not solve the issue.
Keep covenant compliance, working capital, and the weekly cash forecast visible together. A practice can pass an annual ratio and still face a payment-timing shortage.
Before the next test date, give the reviewer the definition sheet, earnings reconciliation, debt schedules, unrounded result, and sensitivity cases. If a breach is possible, have the lender and counsel explain the applicable notice, cure, or waiver process. Record an amendment or waiver only when documented; an improving forecast does not change the existing agreement.
