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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Interest cover ratio

What is interest cover, and how is it different from debt service cover?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Interest cover is operating earnings divided by interest expense: how many times over the business earns its interest bill. It ignores principal repayments, which makes it the natural test for revolving and interest-only structures where no principal is scheduled — and an incomplete one for amortising loans, where debt service cover does the real work. A desk reads the two together: comfortable interest cover with thin debt service cover describes a business that can afford its interest but not its loan, which is a structure problem before it is a credit problem.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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