How much can my business borrow?

Lenders don’t start with a figure. They start with two questions: can the business afford the repayments, and what happens if it can’t? The answer to the first sets a cash flow limit. For secured loans, the answer to the second sets a security limit. You can usually borrow up to the lower of the two, adjusted for the other factors below.

Our guide to how lenders assess business loans explains the assessment process. This article focuses on the size of the loan.

1. Turnover, cash flow and serviceability

Serviceability means whether the business can meet the new repayment on top of everything else it pays. It is usually the main limit.

Lenders look at:

• Turnover. This is the total money coming in, usually taken from bank statements, BAS or financial statements.
• Cash flow. business.gov.au describes this as “the money flowing in and out of a business”. What matters is what’s left after costs.
• Consistency. Steady deposits support a higher limit than lumpy or seasonal income.
• Account conduct. Lenders check average and lowest balances, dishonours and overdrawn days.
• Profit. For larger loans, lenders look at profit and loss statements and tax returns.

A business with high turnover but thin margins may be able to borrow less than a smaller business with healthy margins.

Illustration only: suppose your business has, on average, $20,000 a month left after all costs and existing repayments. If you wanted to keep half of that as a buffer, a new repayment of up to $10,000 a month would be your own limit. The half is your choice for this example, not a lender rule. The business loan repayment calculator shows what loan amount a repayment like that supports over different terms.

2. Security and LVR

For a secured loan, the security sets the upper limit:

Maximum secured loan = value of the security × lender’s maximum LVR − existing debt on that security

LVR limits vary by lender and security type. Residential property usually supports more than commercial property or vacant land. The lender uses its own valuation. What does LVR mean? has worked examples.

Security can raise the amount you can borrow and lower the cost. Some specialist lenders focus mostly on security and the exit plan, for short-term loans. For most longer-term loans, though, the business still has to show it can afford the repayments.

3. How unsecured amounts are often set

Without security, many lenders link the maximum amount to your average monthly turnover from recent bank statements. Some also cap it at a share of annual turnover.

Illustration only: a business with average monthly deposits of $60,000 applies to a lender whose policy, for this example, allows up to one month’s turnover. The maximum would be about $60,000, before any adjustment for existing debts or credit history. Actual multiples vary by lender, and many lenders don’t publish them.

Unsecured loans are usually shorter-term, so the repayments on a given amount are higher. This means serviceability often limits the amount before the turnover multiple does.

4. Time trading

The longer a business has traded, the more evidence the lender has. Newer businesses usually face lower limits, higher costs or a requirement for security. Some lenders set a minimum time trading, which can range from a few months to two years or more. See new business loans.

5. Existing debts, including ATO debt

Lenders add up every current commitment. That includes other loans, equipment finance, credit cards, overdrafts and any tax debt.

• Short-term loans with daily or weekly repayments can take up much of your serviceability, even when turnover is strong.
• ATO debt is treated as a commitment. Lenders want to know how much you owe, whether your lodgements are up to date, and whether any payment plan is being kept to. The ATO may report a business tax debt to credit reporting bureaus if at least $100,000 is overdue by more than 90 days and you aren’t engaging with it to manage the debt. A lender checking your credit file may see that.

If existing debts are the problem, refinancing them into one facility may do more for you than extra borrowing. If you can’t meet what you already owe, read what happens if you can’t pay the ATO and talk to your accountant before you borrow more.

6. Credit history

A clean credit history for the business and its directors gives you the widest choice of lenders and the highest limits. Defaults, judgments or past insolvency usually mean lower amounts, a requirement for security, or both. Moneysmart notes that many recent applications can also count against you. See business finance with bad credit.

7. Purpose

What the money is for changes how lenders size the loan:

• Buying an asset: the asset’s value and any deposit shape the amount.
• Buying a business: the target’s earnings and your contribution matter.
• Working capital: the amount is often tied to turnover and the cash flow cycle. See how much working capital do you need?
• Short-term or bridging needs: the exit, such as a sale or refinance, is central.

A clear, specific purpose with figures behind it supports a larger amount than a general request for funds.

Step by step

Use these steps to estimate your own borrowing capacity before you talk to a lender.

1. Get your average monthly figures. Use the last 6 to 12 months of business bank statements to find average deposits and average balance.
2. Work out your spare cash flow. Subtract all operating costs, drawings or wages for the owners, tax set-asides and existing repayments.
3. Set a repayment you could meet in a slow month. Keep a buffer for seasonal dips and unexpected costs.
4. Convert that repayment into a loan amount. Use the business loan repayment calculator and try different terms.
5. If you have security, work out the security limit. Multiply a conservative value by an illustrative LVR, then subtract existing debt.
6. Take the lower figure. That is a realistic starting point.
7. Adjust for your situation. If you have a short trading history, ATO debt or credit issues, expect a lower limit.

Important things to know

• What a lender will lend isn’t what you should borrow. Borrow for a clear purpose, and only what the business can repay comfortably.
• Repayment frequency matters. Daily or weekly repayments affect your cash flow differently from monthly ones. See how business loan repayments work.
• Estimates aren’t approvals. Every lender applies its own policy, and the final figure depends on its assessment.
• Get advice if you’re stretched. If the numbers only work at the very limit, talk to your accountant first. business.gov.au suggests you understand your income, expenses, debts and cash flow before you apply.