Serviceability is the single most important factor in any commercial credit decision. This guide explains exactly how lenders calculate your ability to repay — and how to present your financials to pass the test.
Most business owners think serviceability means "do I earn enough money?" It's more precise than that. A lender calculates whether your business generates enough free cash flow — after tax, after existing debt repayments, and after a buffer for operating costs — to comfortably meet the proposed new repayments.
The standard formula looks something like this:
Free Cash Flow must be ≥ Proposed Annual Repayments × Coverage Ratio (typically 1.25x to 1.5x depending on lender)
Add-backs are legitimate expenses in your tax return that don't represent ongoing cash outflows — or that the lender is comfortable treating differently. Common add-backs include:
A non-cash expense that reduces accounting profit but doesn't leave the business as cash. Almost always added back to net profit in serviceability calculations.
If the director's salary exceeds a reasonable market replacement cost, the excess may be added back. Some lenders apply a standard benchmark rather than the actual figure.
Interest already paid on existing facilities is added back to avoid double-counting. The lender then models total debt service (existing + proposed) against available cash flow.
Legitimate non-recurring costs — a legal dispute settlement, an equipment write-off — can sometimes be added back if properly documented. Strong narrative matters here.
The three most common reasons a business fails serviceability are not always what owners expect:
Tax-effective structures that reduce taxable profit (trusts, private company structures, aggressive add-backs) can reduce the net profit figure a lender works from. There's a real tension between minimising tax and maximising borrowing capacity — and it needs active management.
A lender will credit-check your business and personal file. Undisclosed commitments — ATO payment plans, personal credit cards, guarantees — appear during assessment and erode serviceability unexpectedly. Disclose everything upfront.
Some lenders use the most recent year, some use the average of two or three years. If one year was abnormally low, which year the lender applies matters enormously. Choosing the right lender for your financial profile — not just the cheapest rate — is often the key decision.
When we assess your position, the first thing we build is a serviceability model using your last 1–3 years of financials. We identify the legitimate add-backs, calculate your current debt service position, and determine what your maximum borrowing capacity looks like — before we approach a single lender. This prevents wasted credit enquiries and means our submission is built around a number we know can be supported.
Start a Free Finance Assessment →Some lenders accept projected revenue — particularly for business acquisitions where a contract is in place, or for practices with a demonstrable track record of growth. However, most commercial lenders want at least one full financial year of evidence. We advise on when projections can be used and how to substantiate them credibly.
It depends on the lender, the year, and how the narrative is framed. Some lenders use a two or three year average — in which case a single bad year has a diluted impact. Others will want a clear explanation for the underperformance. We select lenders whose assessment methodology suits your specific financial history.
Options include: reducing the facility amount, extending the term (which reduces the annual repayment figure), providing additional security, or approaching a lender with a lower coverage ratio requirement. We model all of these before submission — so you know your options before the application goes anywhere.
We'll run a no-obligation credit framing exercise — including a serviceability model built on your actual financials — and give you an honest view of your approval likelihood before anything formal is submitted.
General Advice Warning: Information in this guide is general in nature. Credit products are subject to lender approval criteria.
