This is a response to a fantastic post by Luc Hartwick that I thought might merit it's own post. Original post here >>> https://www.searchfunder.com/post/minimum-dscr

Most lenders won't touch a middle market deal unless the Debt Service Coverage Ratio (DSCR) is greater than or equal to 1.25x.

Wait, but why? To put it simply --- once a company's DSCR falls below 1.00x it means that the company's free cash flow is not sufficient to service the debt. Obviously a huge problem for lenders (AND equity holders).

Banks like 1.25x because it gives them a level of cushion, which means the company should be able to successfully manage through tough situations, when cash flow may be tight. Makes sense!

But what if your new deal is penciling in below the minimum 1.25x DSCR requirement?

Is it game over??? Not necessarily.

Here's one hail marry, ninja move that can work. I've seen lenders switch from "heck no" to "absolutely" because of this little trick.

Here's the gist: as the borrower, you're going to park some additional cash with the lender.

How much cash? Equivalent to the year 1 interest payment.

This money will sit in a bank-controlled Interest Reserve Account that you can't touch.

Sometimes this can get the job done because it artificially increases your DSCR (at least in year 1) above the 1.25x minimum requirement. It allows the bank to underwrite the deal as if you've already made your year 1 interest payment...because...well...they've already got your money stashed away.

To be clear --- this doesn't always work. But if the company is coming off of a bad year, or it's proven to be a resilient cash flow producer for 5+ years, some lenders will get on board.

Happy searching!!! - Grant