Quick answer
Net profit is what a business has left from its income after every expense is paid: cost of sales, wages, rent, interest, depreciation and the rest. It's the bottom line of the profit and loss statement. Lenders use it as a starting point for working out whether the business can afford repayments, usually after adding back non-cash and one-off items.
Key points
- Net profit = gross profit minus all operating expenses, interest and depreciation
- It can be shown before or after tax, so check which figure a lender is quoting
- Tax-minimised profit can understate how much the business could actually repay
- Lenders often add back depreciation, interest on debt being refinanced and one-off costs
Net profit is the money the business actually made over a period once everything has been paid for. Take total income, subtract the cost of goods sold to get gross profit, then subtract every overhead: wages, rent, software, insurance, interest, depreciation. Whatever is left is net profit, the “bottom line” of your profit and loss statement.
Before tax, after tax and the figures in between
Several versions of profit appear in a set of accounts, and lenders will quote different ones depending on their method:
| Measure | What’s been taken out |
|---|---|
| Gross profit | Direct costs of sales only |
| EBITDA | All operating costs, but not interest, tax, depreciation or amortisation |
| Net profit before tax | Everything except income tax |
| Net profit after tax | Everything, including income tax |
For a sole trader there is no company tax line: the business’s net profit flows into the owner’s personal tax return. For a company, net profit before tax is struck after any director wages, so two businesses with identical trading can look very different depending on how the owners pay themselves.
Why the bottom line matters when you borrow
A lender’s core question is whether the business can meet repayments from what it earns. Net profit is where that test begins, which is why business.gov.au lists financial statements among the documents lenders typically ask for.
The trouble is that many small businesses run their profit down deliberately. Prepaying expenses before 30 June, buying equipment under the instant asset write-off, and paying family members all reduce taxable profit. That’s sensible tax planning, but it leaves a smaller number for a credit assessor to work with.
Lenders deal with this through add-backs. Typical items they’ll put back into the figure:
- depreciation and amortisation, because no cash left the business
- interest on any debt the new loan will pay out
- one-off costs with evidence, such as a legal settlement or a flood repair
- owner wages above a reasonable market salary, at some lenders
What they won’t add back is ordinary spending that will keep recurring, however much you’d like it to.
Worried your tax return makes the business look weaker than it is? Tell us the real picture and we’ll explain which lenders allow for it.
A worked example
A Geelong landscaping company finishes the financial year with:
- income of $1.2m
- cost of sales of $640k, giving gross profit of $560k
- overheads (wages, vehicles, rent, insurance) of $455k
- depreciation of $48k and interest of $17k
Net profit before tax is $560k − $455k − $48k − $17k = $40k. On paper that looks thin for a $150k equipment loan. Add back the $48k depreciation and the $17k interest on a loan being refinanced, and the cash available to service debt is about $105k, a much stronger story. Whether a given lender accepts both add-backs is the next conversation, and the debt service coverage ratio calculator shows how the figure translates into borrowing capacity.
When the profit figure doesn’t tell the whole story
If last year’s net profit undersells the business because of a bad quarter, a big write-off or an accountant who hasn’t finished the return, you still have options. The RBA has noted that many lenders now lean on bank statements and transaction data for smaller loans. Low doc business loans and bank statement lending can look past the tax return, and property-secured loans weigh the security more heavily. Our page on business loans without financials covers that path in more depth.
Related terms
Profit low on paper but the business is sound?
That gap between taxable profit and real earning power is one of the most common reasons good businesses get knocked back. Tell us what the business actually turns over and what’s going out each month, and a lending specialist will read it and call you to explain which lenders assess it fairly.
It’s a short form, roughly sixty seconds. Asking is free of any credit check, and we don’t pass your details around a crowd of lenders. Put in honest, accurate numbers and we can point you to the right structure on the first call.
Frequently asked questions
What's the difference between gross profit and net profit?
Gross profit is sales less the direct cost of making those sales. Net profit goes further and subtracts every other expense too, such as rent, wages, insurance, interest and depreciation. A business can have a healthy gross margin and still post a thin net profit.
Is net profit the same as cash in the bank?
No. Net profit counts income when it's earned and expenses when they're incurred, including non-cash items like depreciation. Unpaid invoices, stock purchases and loan principal repayments all make cash differ from profit.
Do lenders use net profit before or after tax?
Most start from net profit before tax in the financial statements or tax return, then make adjustments. Ask the lender which version it's using, because the after-tax figure is lower.
My accountant kept our profit low for tax. Will that hurt my application?
It can. A bank will usually lend against what the documents show. Some lenders accept add-backs, recent BAS or bank statements that show stronger trading, and low doc lenders may rely less on the tax return altogether.
Can a business with a net loss still get finance?
Sometimes. Property-secured loans lean more on the security than on profit, and invoice finance leans on the quality of your customers. A loss with a clear explanation, such as a one-off write-off, is viewed differently from a pattern of losses.