How Is Borrowing Capacity Calculated?
Lenders calculate business borrowing capacity by assessing your net cash flow, taxable income, existing debt commitments, and applying a serviceability buffer.
How do lenders calculate borrowing capacity?
When calculating borrowing capacity for Australian business borrowers, lenders evaluate your net business income and operational cash flow. For companies, sole traders, and ABN holders, this process usually involves reviewing your past one to two years of business tax returns, ATO Notice of Assessments, and profit and loss statements to establish baseline earnings.
Next, lenders factor in all current financial commitments, including existing asset finance, commercial overdrafts, business credit cards, and personal liabilities. They then apply a serviceability assessment rate—adding a buffer to current interest rates—to confirm your business can comfortably manage repayments even if interest rates or operating expenses increase.
Lender policies vary significantly, particularly regarding how they treat add-backs like depreciation, director wages, or one-off business expenses. If recent financial statements are unavailable, alternative options like low doc commercial loans allow income verification using Business Activity Statements (BAS), business bank statements, or an accountant declaration to assess realistic serviceability.
Because each commercial lender uses distinct borrowing capacity calculators and policy criteria, matching your financial situation to the right lender is essential. A Lonix broker can compare policies across an extensive marketplace of business lenders and properly structure your loan to maximise borrowing power without putting unnecessary strain on your credit file.
Related questions
- What add-backs can increase my business borrowing capacity?
- Lenders often add back non-cash expenses such as depreciation, one-off operational costs, interest charges, and instant asset write-offs to your net profit to establish your true cash flow.
- How long do I need an ABN to qualify for a business loan?
- Most traditional lenders require a minimum of 12 to 24 months of active ABN trading. However, some specialised lenders offer flexible options for newer businesses with strong cash flow.
- Does a balloon payment affect my borrowing capacity?
- Yes, setting a balloon payment reduces your ongoing monthly repayments, which can improve your cash flow and serviceability assessment with certain commercial lenders.
- How do credit card limits impact borrowing capacity?
- Lenders assess borrowing capacity based on your total credit card limit rather than the current balance, assuming the limit could be fully drawn at any time.