Debt Service / Servicing

Debt service or debt servicing implies the regular payment of installments of loans. An installment includes interest on debt and a part of the principle. For servicing debt, a company or an individual should have those timely cash flows. If a company is unable to honor its debt service obligations in the absence of required funds, the company is said to be unable to service its debt.

What is debt service? / Definition

The literal meaning of debt service is ‘paying dues of a debt in the form of interest and principal’. Servicing a debt means paying the interest and the principal on time. Individuals may service debts relating to the home loan, student loans etc whereas companies may have various types of loans like bonds, term loans, working capital loan etc.

Debt Service Calculation with Example

Suppose a company has taken a loan of $100,000 at an interest rate of 10% for a term of 10 years. Debt Service / Debt ServicingConsidering terms of payment to be 1 installment a year, the first year debt servicing amount would be $16275 consisting of $10,000 of interest payment and $6275 of principal repayment. If quarterly payment opts, the amount would have been $ 3984 (Interest $2500 + Principal $1484).

Debt Service Reserves

Debt service reserves are the reserve funds maintained by a company to ensure full and timely payment of debt service amount. The reserve may be accumulated in the reserve fund out of the debt acquired or revenues over a period of time. Terms and conditions of some debts or bonds may compulsorily require the company to maintain such reserve. It is also another way of ensuring timely serving of debt service obligations by the borrower.

Importance of Debt Servicing

A business cannot run without funds and that is well-understood fact. Hence, debts are an integral part of any business but arranging debt is not an easy task. The bank or institution or any investor for that matter should have the faith in the company before extending debt or investing its hard earned money. Debt servicing capacity is that indicator which assures the investor about the safety of its money. A very well known ratio called ‘debt service coverage ratio’ is calculated to assess the borrower about its capacity to service the debt.

Regular servicing of debt indicates a good credit record for any company. This credit record creates a reputation in the market of investors. Therefore, for the smooth functioning of a business and keep the availability of funds when required, a finance manager should focus on debt servicing on a regular basis.

Last updated on : March 20th, 2018
What’s your view on this? Share it in comments below.

Leave a Reply

Days Sales Outstanding
  • Current Ratio
    Current Ratio
  • How to analyze and improve Current Ratio
    How to analyze and improve Current Ratio?
  • DuPont Analysis
    DuPont Analysis
  • How to Reduce Current Ratio and Why?
    How to Reduce Current Ratio and Why?
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook


    Related pages


    bep accountingoperating capital loansadvantages and disadvantages of capital asset pricing modelexplain the concept of profit maximizationdiscounted cash flow model exampleaccounting method cash vs accrualadvantages and disadvantages of financial statementtotal credit sales formulairr fomulaformula for receivable daysreceivables turnover days formulamodigliani and miller 1963disadvantages of long term financingdcf calculation formuladebenture meansdividend warrant meaningadvantages of arrnet advantage to leasingexamples of capital budgeting projectslading meaningdefinition of lessee vs lessorissuing debenturesdsc financial servicesdividend payout ratio formulatod financial termsynopsis on working capital managementsimple payback calculatordefine paybacktrade payables turnover ratiomeaning of leverage in financial managementpreference shares fixed dividendsale and leaseback disadvantagesjournal accounting entries examplestotal asset turnover ratio calculatoradvantages and disadvantages of npv methodfinance lease in cash flow statementexplain irrr&d capitalization us gaaplong term debt calculatorasset liabilities ratiobank loan covenantssales forecast calculationfinancial leverage percentage formulaformula for accounting equationstakeholder stockholderturnover formula accountingleveraged capital structuredistinguish between management accounting and financial accountingcapital lease accounting lesseesimilarities between management accounting and cost accountingconvertible debentures financial postdifference between credits and debitsdebtors days formuladifference between bond and debenturedefine gdrtypes of bill of ladingcalculating dividend growth rateexamples of debit and credit entriesformula for mirrordinary shares vs preference sharesdefinition of derivative marketlimitations of capmletter of credit negotiable instrumentmeaning of lessor and lesseedecoupling function of inventorydifference between account payable and notes payablehow to calculate payback periodcredit risk is the risk that the borrower will notconglomerate diversification exampleswho is the lessor vs lesseebird in the hand dividend theorydividend decision theoriesscrip issueshypothecation and pledgeprofit maximisation definitioninvested capital turnover ratioworking capital demand loanbep in unitsfinancial vs managerial accounting