Serviceability: how lenders test whether you can repay

Serviceability is the question behind almost every business lending decision: can this business actually make the repayments? How a lender answers it depends on the product and the lender type. This entry explains the calculation, the adjustments lenders make and how to present your numbers well.

What does a serviceability calculation look like?

A traditional bank-style calculation starts from the profit and loss statement and works towards the cash available for debt:

Step	Illustrative figure
Net profit before tax	$180,000
Add back depreciation	+ $40,000
Add back interest on loans being refinanced	+ $15,000
Add back genuine one-off costs	+ $10,000
Less owner’s drawings above wages already expensed	− $30,000
Cash available for debt servicing	$215,000
Total annual repayments (existing + new)	$140,000
Debt service coverage ratio	1.54×

All figures are illustrative. A lender comparing that ratio against its policy would also apply a buffer — testing whether the business could still cope if costs rose or revenue dipped.

What are add-backs, and which are accepted?

Add-backs adjust accounting profit towards true cash-generating capacity. Commonly accepted:

• Depreciation and amortisation — non-cash expenses.
• Interest on debts being paid out by the new loan.
• One-off costs — a legal dispute, a relocation, a large repair — if documented.
• Excess owner remuneration in some cases, where the owner pays themselves more than a market wage.

Lenders are sceptical of add-backs that recur every year under different names. Being able to evidence each one — an invoice, an accountant’s note — makes them more likely to be accepted.

How do different lenders test serviceability?

Lender type	Main evidence	Style
Banks	Two years of financials and tax returns, plus management accounts	Formal DSCR and buffers
Non-bank unsecured lenders	Six to twelve months of bank statements	Deposits vs existing commitments
Low doc lenders	Statements, BAS, accountant’s letter	Cross-checked turnover
Property-secured private lenders	Varies; property and exit weigh heavily	Serviceability alongside equity
Invoice and trade financiers	Receivables and trade cycle	The asset repays the debt

That variety is useful. A business that looks weak on last year’s tax return but strong in its last six months of statements may suit a non-bank lender better. See bank vs non-bank lenders.

What counts against you in a serviceability test?

• Existing repayments you didn’t mention. They’ll appear in statements anyway.
• Stacked short-term debts with daily or weekly repayments.
• Declining revenue without an explanation.
• ATO payment plans, which lenders count as a commitment.
• Irregular deposits that make average turnover look unreliable.
• Personal commitments of guarantors, for some lenders.

How can you strengthen your serviceability position?

1. Get management accounts up to date so the lender sees current trading, not last year’s.
2. Document add-backs with a short note from your accountant.
3. Consolidate or pay down small, expensive facilities before applying.
4. Match the term to the purpose. A longer term lowers annual repayments on long-lived assets.
5. Explain dips. A seasonal quarter or a one-off loss is less worrying when it’s explained.

If you’d like a second opinion on how your numbers might be read, you can talk it through with a specialist.

Serviceability for different products

Serviceability looks different across the product range. For unsecured business loans, it’s almost the whole assessment. For property-secured loans, it shares the stage with LVR and the exit. For invoice finance, the lender relies more on your customers paying than on your profit. Knowing which test applies helps you present the right evidence first.

Does serviceability consider the owner’s personal position?

Often, yes. For small businesses, lenders may ask guarantors about their personal income, assets and debts, because the guarantee is part of the lender’s comfort. Personal home loan repayments and other commitments can affect how much the business can borrow, particularly with banks.

Terms used in this entry

• Add-back — an expense added back to profit to show true cash capacity. Glossary →
• DSCR — available cash flow divided by debt repayments. Glossary →
• EBITDA — earnings before interest, tax, depreciation and amortisation. Glossary →
• Serviceability buffer — extra headroom built into the test. Glossary →

Worked example (illustrative)

Illustrative only. An IT services company’s latest tax return shows a modest profit because it wrote off new equipment and paid a large one-off legal bill. It wants a $300,000 term loan.

Its accountant prepares a one-page summary adding back depreciation, the legal costs and interest on two small loans the new facility will repay. The adjusted figure shows the business comfortably covering the new repayments. The lender’s own calculation lands close to the accountant’s, and the loan proceeds without the lender reading the thin tax-return profit as the full story.

Know your numbers, then find the lender that reads them right

Different lenders test serviceability in different ways, and the right match can change the answer. The enquiry takes about a minute and there’s no credit check when you first enquire. We don’t send your details to a pile of lenders; a real person looks at how your business earns and calls you. Please be accurate about turnover and existing repayments so we can match you with a lender whose test fits your business first time.

See if you qualify →