Serviceability is the single most important factor in any commercial credit decision. Most business owners get it wrong and lose borrowing capacity they did not know they had. This guide explains exactly how lenders calculate it, written by someone who spent 20 years doing exactly that calculation.
Serviceability is whether your business generates enough free cash flow, after tax, after existing debt repayments, and after operating costs, to comfortably meet the proposed new loan repayments. It is not simply about income. It is about the gap between what comes in and what goes out.
Free Cash Flow must be at or above Proposed Annual Repayments multiplied by the Coverage Ratio. Typically 1.25x to 1.5x depending on lender and facility type.
Add-backs are legitimate expenses in your tax return that do not represent ongoing cash outflows, or that the lender treats differently for serviceability purposes. Getting add-backs right can materially increase the borrowing capacity a lender will support. Getting them wrong, or failing to claim them at all, leaves capacity on the table.
A non-cash expense that reduces accounting profit but does not leave the business as actual cash. Almost always added back to net profit in commercial serviceability calculations.
If a director's salary exceeds a reasonable market replacement cost, the excess may be added back. Some lenders apply a standard benchmark rather than the figure in the tax return, which can work for or against you depending on your remuneration structure.
Interest already paid on existing facilities is added back to avoid double-counting. The lender then models total debt service, existing plus proposed, against available free cash flow.
Legitimate non-recurring costs, a legal settlement, an equipment write-off, can sometimes be added back if properly documented. This is where credit argument matters. An unexplained one-off stays in the numbers.
Structures that legitimately reduce taxable profit also reduce the profit figure a lender works from. There is a real tension between minimising tax and maximising borrowing capacity. It needs active management, not a set-and-forget approach.
A lender will credit-check your business and personal file. Undisclosed commitments, ATO payment plans, personal credit cards used for business, guarantees provided to third parties, appear during assessment and erode serviceability unexpectedly. Disclose everything upfront.
Some lenders use the most recent year. Others average two or three years. If one year was abnormally low, which year the lender applies can change the outcome entirely. Choosing the right lender for your financial profile is often the single most important decision.
The first thing Krishna builds is a serviceability model using your last one to three years of financials. He identifies legitimate add-backs, calculates your current debt service position, and determines your maximum borrowing capacity before approaching a single lender. This prevents wasted credit enquiries and ensures every submission is built around a number the lender can actually approve.
Get a Free Serviceability Assessment →Some lenders accept projected revenue for business acquisitions where a signed contract is in place, or for practices with a demonstrable track record of consistent growth. Most commercial lenders want at least one full financial year of historical evidence. Krishna advises on when projections can be used credibly and how to substantiate them in a way the lender will accept.
It depends on the lender, the year, and how the narrative is framed. Some lenders use a two or three-year average, meaning a single difficult year has a diluted effect. Others will want a clear explanation for the underperformance. Krishna selects lenders whose assessment methodology suits your specific financial history, not just the lender with the headline rate.
Options include reducing the facility amount, extending the term to lower the annual repayment figure, providing additional security, or approaching a lender with a lower coverage ratio requirement. Krishna models all of these before submission so you know your actual options before anything goes anywhere.
Self-employed income is assessed using tax returns, typically over two years, rather than payslips. The treatment of distributions, drawings, and trust income varies significantly between lenders. Some lenders are far more favourable for self-employed borrowers than others. Correct income presentation can change the serviceability outcome materially.
Most commercial lenders require a coverage ratio of 1.25x to 1.5x, meaning your free cash flow must be 25-50% higher than the proposed annual repayments. Some non-bank lenders apply lower ratios for secured facilities. Krishna models this for your specific profile before selecting a lender.
Krishna will build a serviceability model using your financials at no cost and no obligation, and give you a clear view of what the numbers support before any application goes anywhere.
General Advice Warning: Information in this guide is general in nature and does not constitute financial or credit advice.