To calculate total debt service, add your annual principal payments, your annual interest payments, and your annual lease obligations across every loan, bond, and finance lease you carry. The result is a single yearly number showing exactly how much cash must leave the business to keep every creditor satisfied. That figure is what lenders compare against your net operating income when they decide whether to extend credit.
The Formula
Total Debt Service = Annual Principal Payments + Annual Interest Payments + Annual Lease Payments
Each piece captures a distinct slice of what you owe:
- Principal payments are the portion of each loan payment that reduces the balance you actually owe. If you send $5,000 a month on a commercial mortgage and $3,200 of that reduces the balance, the $3,200 is principal.
- Interest payments are the cost of borrowing. In the same example, the remaining $1,800 per month is interest charged by the lender.
- Lease payments cover obligations under capital or finance leases that function like debt. An equipment lease at $2,000 a month counts. Operating costs bundled into a triple-net lease, like maintenance or insurance, do not.
If your company has issued bonds with a sinking fund requirement, the annual deposits you must set aside to retire those bonds at maturity are debt service too. The cash is contractually committed to repaying borrowed capital, so include it.
A Worked Example
Say your business carries three obligations:
- A commercial mortgage with a monthly payment of $8,000, split $4,500 principal and $3,500 interest.
- An equipment loan at $2,000 a month, split $1,400 principal and $600 interest.
- An equipment lease at $1,500 a month, all counted as a lease obligation.
Convert each monthly figure to an annual number by multiplying by twelve:
- Annual principal: ($4,500 + $1,400) × 12 = $70,800
- Annual interest: ($3,500 + $600) × 12 = $49,200
- Annual lease payments: $1,500 × 12 = $18,000
Add them: $70,800 + $49,200 + $18,000 = $138,000. That $138,000 is your total annual debt service. Every dollar of it is spoken for before you pay an employee, cover utilities, or reinvest.
The multiplication-by-twelve step matters because lenders compare debt service against annual net operating income, not monthly figures. Keeping everything on the same annual basis prevents mismatches that could make your position look better or worse than it is.
Where to Find the Numbers
The principal and interest split for each loan sits on your monthly loan statement or amortization schedule. Federal rules under the Truth in Lending Act require lenders to disclose a payment schedule at origination showing the number, amounts, and timing of payments, and mortgage lenders must break out principal, interest, and estimated escrow separately for each period.1eCFR. 12 CFR Part 226 — Truth in Lending (Regulation Z) If the original disclosure has gone missing, your current servicer’s monthly statement shows the same breakdown.
Lease obligations appear in the signed lease agreement, usually as a fixed monthly or quarterly amount. Separate the base lease payment from any bundled charges for property taxes, insurance, or common area maintenance. Only the base obligation that retires the lease liability counts toward debt service.
For bonds outstanding, the indenture or offering circular spells out the sinking fund schedule and coupon dates, and your trustee’s annual report confirms the exact amounts due. Gather all of these documents before you start adding, so you aren’t estimating when you should be reading.
What to Leave Out
Not every cash outflow belongs here. The point of total debt service is to isolate what you owe creditors on borrowed money, so anything else stays out.
- Operating expenses. Payroll, utilities, inventory, and rent on operating leases that don’t function as financing keep the business running, but they aren’t debt repayment.
- Taxes. Income, property, and payroll taxes are mandatory, but they are owed to governments, not creditors. They appear elsewhere in your financials.
- Dividends and distributions. Payments to shareholders or partners are a return on equity, not a contractual debt. Including them inflates the figure and misrepresents your leverage.
- Contingent liabilities. Guarantees you’ve signed for someone else, pending settlements, and warranty reserves don’t create a current payment obligation. Under standard accounting rules, a contingent liability isn’t recognized on the balance sheet unless an outflow is both probable and measurable. If a guarantee gets called, it becomes real debt at that point and enters the calculation then.
Including any of these items makes your borrowing capacity look worse than it is. The whole purpose of isolating debt service is to give a lender a clean comparison between what you earn and what you owe creditors specifically.
Variable Rates and Balloon Payments
Fixed-rate loans are easy because the principal-and-interest split follows a predictable schedule. Variable-rate debt is harder. When the reference rate moves, the interest component moves with it, sometimes sharply.
For a current-period calculation, use the rate actually in effect now and the payments you’re actually making. If you’re projecting forward, run at least two scenarios: one at the current rate and one at a stressed rate assuming increases. The Federal Reserve uses this approach when stress-testing corporate debt servicing capacity, projecting interest expense for floating-rate loans by assuming rates reset immediately when the reference rate changes.2Board of Governors of the Federal Reserve System. Stress Testing the Corporate Debt Servicing Capacity: A Scenario Analysis If your loan has a rate floor or ceiling in the agreement, use those bounds for your best-case and worst-case projections.
Balloon payments create a different problem. When a term loan is within twelve months of maturity and the remaining balance comes due as a lump sum, that entire balloon amount becomes a current obligation. Even if you fully intend to refinance, the balloon belongs in annual debt service for that year until a new loan closes. Leaving it out understates what you owe and can trigger a covenant violation when a lender runs the ratios.
What the Number Is For
The reason to calculate total debt service is usually to plug it into the debt service coverage ratio:
DSCR = Net Operating Income ÷ Total Debt Service
Net operating income is revenue minus operating expenses, before debt payments and taxes. If the business in the worked example generates $180,000 in net operating income, its DSCR is $180,000 ÷ $138,000 = 1.30. That means $1.30 of income for every $1.00 of debt payment.
A DSCR below 1.0 means you don’t generate enough income to cover your debt. Most commercial lenders want at least 1.25x, meaning 25% more income than debt obligations. Fannie Mae’s multifamily loan program sets a minimum DSCR of 1.25x.3Fannie Mae. Conventional Properties Term Sheet SBA 7(a) loans over $350,000 require a minimum DSCR of 1.15x, though many individual lenders hold to 1.25x regardless of the SBA floor.
For investors with multiple properties, lenders sometimes calculate a global DSCR combining net operating income and debt service across the whole portfolio. That gives a fuller picture of whether the borrower can absorb a vacancy or a rate increase on one property without defaulting across the board. However you aggregate it, the inputs on the debt side are the same three numbers: principal, interest, and lease obligations, converted to an annual figure and added.