When buyers discuss financing, purchase price often dominates the conversation. It’s visible, easy to compare, and feels like the main lever in a deal. From a bank’s perspective, however, debt service coverage ratio (DSCR) is usually far more important. DSCR answers a simple but critical question: can the business comfortably service its debt on a sustainable basis?

DSCR measures how much cash flow is available relative to required loan payments. A higher ratio means more cushion. A thinner ratio means less room for error. Banks rely on DSCR to evaluate the margin for error in cash flow, the ability to absorb unexpected expenses, and the long-term sustainability of the loan. Even a well-priced deal can struggle if coverage is thin, while a higher-priced deal can sometimes be financeable if coverage is strong and consistent.

This is why purchase price alone isn’t enough. A lower price does not automatically translate into a safer loan. Banks look beyond price to assess realistic operating expenses, owner compensation assumptions, and ongoing capital needs. If expenses are understated, compensation is unrealistic, or capital needs are ignored, DSCR will be overstated—and the risk will show up later. DSCR reflects how all of these factors interact in the real world, not just on a term sheet.

Consider two deals with similar prices. One has conservative assumptions, normalized expenses, and stable historical performance. The other depends on optimistic projections, temporary cost savings, or unusually low owner compensation. On paper, the second deal might look cheaper. In underwriting, the first deal will almost always be more attractive because the DSCR tells a more reliable story about the business’s ability to carry debt through normal ups and downs.

Banks also use DSCR to think about the future, not just the past. They stress-test scenarios: What happens if volume softens? What if expenses rise? What if a key employee leaves? A healthy DSCR provides flexibility in these situations. Thin coverage leaves no room for normal business volatility and increases the chance that a small issue becomes a big problem.

This is why experienced lenders spend so much time normalizing cash flow and validating assumptions before focusing on price. Price matters, but DSCR is what determines whether the structure is durable. In many cases, improving DSCR through better structure, more realistic assumptions, or additional equity does more to strengthen a deal than negotiating a slightly lower purchase price.

The practical takeaway is simple: strong DSCR provides flexibility and confidence. Banks are far more comfortable approving loans when coverage supports long-term stability, because stable coverage—not just a good price—is what keeps a loan performing over time.

About the Author

Matt Manske is a bank loan officer with over 20 years of experience specializing in funeral home financing. He works directly with borrowers to structure transactions that align with real-world bank underwriting. Additional educational resources can be found at www.funeralhomeloan.com.