How Much Existing Debt Is Too Much?
Lenders assess liabilities by measuring total commitments, credit limits, and ATO debts against your business cash flow to determine serviceability and overall risk.
How do lenders assess liabilities?
Australian lenders do not just look at your current loan balances; they assess your total financial commitments against cash flow. For business borrowers—whether operating as a sole trader or company—lenders calculate debt serviceability using monthly repayment obligations, including interest rate buffers. Unused credit limits on commercial overdrafts or credit cards are often treated as fully drawn, reducing your borrowing capacity regardless of your actual balance.
Lenders also closely scrutinise specific types of debt. Existing equipment finance, vehicle loans with balloon payments, and commercial mortgages are stress-tested. ATO tax debts or portal liabilities are major red flags unless backed by a formal payment plan. Additionally, for sole traders or directors acting as personal guarantors, personal liabilities like residential mortgages and personal loans directly impact total serviceability.
Having existing debt is not an automatic rejection, provided your net operating income comfortably covers all commitments with an adequate serviceability margin. However, high debt relative to asset values increases your Loan-to-Value Ratio (LVR), which may trigger stricter documentation requirements, higher comparison rates, or lender requests for extra security.
Navigating different lender policies on liabilities can be complex, as credit assessment models vary significantly across commercial banks and non-bank lenders. A Lonix broker can compare lenders and structure the loan to present your financial position clearly and maximize your approval chances.
Related questions
- Does an ATO tax debt affect my business loan application?
- Yes, lenders view unpaid ATO liabilities as a primary risk indicator. Having an established ATO payment plan with a clean history helps, though some lenders require tax debts to be cleared prior to settlement.
- Why do lenders assess unused credit card limits as fully drawn?
- Lenders must calculate your borrowing capacity based on a worst-case risk scenario where all available credit is maxed out. Reducing or closing unused credit card and overdraft limits before applying can boost your calculated serviceability.
- What is a Debt Service Coverage Ratio (DSCR)?
- DSCR measures your net operating income against your total annual debt obligations. Australian commercial lenders typically look for a ratio of 1.2x to 1.5x to ensure your cash flow comfortably covers repayments.
- Can I consolidate existing business debts into a new facility?
- Yes, refinancing short-term loans, equipment finance, or ATO debt into a single structured facility can reduce monthly commitments, simplify cash flow management, and improve overall serviceability.