Quick answer
Explain a bad year to a lender by showing three things in writing: what caused the drop, why it was temporary or has been fixed, and proof that trading has recovered since. Back each claim with evidence such as year-to-date accounts, recent BAS, bank statements and contracts. Keep it to one page, disclose it before the lender finds it, and match the loan type to your current figures.
Key points
- Assessors don't penalise a bad year as much as an unexplained one
- Separate one-off causes from structural ones, and say honestly which yours was
- Recent BAS, bank statements and year-to-date accounts prove a recovery better than words
- The ATO's small business benchmarks can show a downturn hit your whole industry
- Some lenders assess on the last six to twelve months, so a weak tax year matters less to them
A credit assessor reading your file sees a line on a spreadsheet: revenue down, profit gone, maybe a loss. They don’t see the burst water main that closed your kitchen for five weeks, the builder who went into liquidation owing you $86k, or the six months you spent caring for a parent. Unless you tell them, the number is the whole story.
That’s the core of explaining a bad year. You aren’t asking the lender to ignore it. You’re giving them enough context and evidence to judge it fairly, and to see that the business in front of them today is not the one in that set of accounts.
Why does one bad year worry lenders so much?
Lenders look backwards to predict forwards. Historical results are the most reliable evidence they have of how your business performs, so a weak year raises an obvious question: is this the new normal?
How much it hurts depends on how the lender assesses you.
| Lender type | How a bad year shows up | How much it weighs |
|---|---|---|
| Major and regional banks | Two years of financials and tax returns, often averaged or the weaker year used | Heavily; may cut the amount or trigger a decline |
| Non-bank lenders (full doc) | Latest financials plus current-year figures | Moderately; a clear recovery can offset it |
| Fintech and low doc lenders | Mainly the last 6–12 months of bank statements | Lightly, if recent deposits are steady |
| Private and property-secured lenders | Equity in the security and the exit plan | Least; cash flow matters but security leads |
So the same bad year might close the door at one lender and barely register at another. Part of explaining it well is putting your explanation in front of a lender whose method fits your current numbers.
There’s also a wider backdrop worth knowing. The Reserve Bank’s October 2025 bulletin on small business conditions noted that company insolvencies had risen in recent years, driven mostly by firms with fewer than 20 staff, with hospitality and construction especially affected. Assessors read the same reports. If you’re in one of those industries, expect them to ask about your weak year more carefully, and be ready with a sharper answer.
Was your bad year one-off or structural?
Before you write a word, be honest with yourself about this. Assessors sort explanations into two buckets, and they’re good at spotting the difference.
One-off causes are events that hit once and have passed:
- a natural disaster, fire or flood that closed the business for a period
- the loss of a major customer to insolvency, with a resulting bad debt
- illness, injury or a family crisis that took the owner out of the business
- a large legal dispute, now settled
- a relocation, refit or rebuild that cut trading for some months
Structural causes are changes in the business or its market:
- a competitor opened next door and took a share of trade
- costs rose faster than prices for a sustained period
- the industry itself shrank or changed
- a key contract ended and wasn’t replaced
A structural cause isn’t fatal. But the explanation has to show what you changed in response: new pricing, a cheaper lease, a different customer mix, a leaner team. Telling a lender that a structural problem was “a one-off” is the quickest way to lose their trust, because the following year’s numbers will contradict you.
What evidence turns a story into something a lender can rely on?
Assessors are trained to be sceptical of narrative. Every claim in your explanation should point to a document. Think of it as an evidence pack with the letter on top.
Proof of the cause
- insurance claim correspondence, or a disaster declaration covering your area
- the liquidator’s notice for a failed customer and your proof of debt
- a medical certificate (you don’t need to share details, just dates)
- the settlement deed for a dispute, or a lease for new premises
Proof the cause has ended
- confirmation the insurance claim has been paid or the repairs completed
- new contracts or customers that replaced lost revenue
- a revised price list and the date it took effect
Proof of recovery
This is the part that carries the most weight. Recent figures matter more than past ones because they show the business as it is now.
- BAS for the quarters since the bad year. Your GST turnover figure (label G1) shows the trend quarter by quarter, and the ATO holds the same numbers, so it’s credible.
- Year-to-date profit and loss, ideally compared month by month with the same period in the bad year.
- Business bank statements for the last six months, which should match what your management accounts say. Our explainer on how lenders read your bank statements shows what they’ll calculate from them.
- A short accountant’s letter confirming the year-to-date position and quantifying any one-off costs.
Industry context, if it helps
The ATO publishes small business benchmarks for about 100 industries, showing typical cost ratios against turnover. If an input cost blew out across your whole sector, comparing your ratios with the benchmark can show that your bad year reflected the market rather than poor management. Use it sparingly; one line in the letter is enough.
How do add-backs change the numbers?
Many lenders will “add back” certain expenses to your profit when they assess whether you can afford repayments. Depreciation, interest on debt being refinanced and genuinely one-off costs are the usual candidates. Our glossary entry on add-backs explains the common ones.
This matters for a bad year because a large one-off cost can turn an otherwise profitable year into a loss on paper. If you can document it, an assessor may restore it.
Consider an illustrative example. A Toowoomba landscaping company reported a net loss of $22k for 2025–26. Inside that figure sat $61k of one-off costs: $38k written off when a developer client entered liquidation, and $23k of legal fees to recover part of it. Adding those back gives an underlying profit of $39k. Add back depreciation of $27k and interest of $9k on equipment finance being refinanced, and the business shows $75k available to service debt. That’s a very different conversation from “made a loss”.
The lender may not accept every add-back. But you’ve moved the discussion from whether you lost money to how much of the loss was real. To see how that underlying figure flows into an affordability test, read what lenders mean by serviceability.
What should the explanation letter look like?
One page. Plain language. No adjectives doing the work that evidence should do. Assessors read dozens of these, and the short, specific ones get believed.
A structure that works:
- The headline. One sentence: “Our 2025–26 profit fell to a $22k loss because a major client went into liquidation owing us $38k.”
- What happened and when. Three or four sentences with dates and amounts. Attach the proof.
- What you did about it. The actions you took, in order: chased the debt, tightened credit terms, required deposits on large jobs, replaced the client.
- Where the business is now. Year-to-date turnover and profit, compared with the same months last year. Point to the BAS and statements attached.
- Why it won’t happen again, or what’s different if it does. New credit checks on clients, a cash buffer, insurance cover you didn’t have before.
- What you’re asking for and how it’s repaid. The amount, the purpose, and the source of repayments.
Things to leave out: blame aimed at staff, customers or the bank; long accounts of how stressful it was (assessors understand, but it doesn’t help them decide); and predictions without evidence (“we expect a record year”).
If writing this is the hard part, you don’t have to perfect it before talking to us. Tell us briefly what happened and someone will help you work out which lenders will listen.
When should you raise the bad year?
Early. Ideally in the first conversation or the first email, before the lender pulls your financials.
Raised first, a bad year is context. Discovered by the assessor halfway through, it becomes a credibility problem: they start wondering what else hasn’t been mentioned. The same applies to anything the bad year left behind, such as an ATO debt, a missed repayment or a default on your credit file. Lenders who work with those situations, like those listed under ATO tax debt business loans, still want to hear about them up front.
Timing your application around your accounts can help too. If your next tax return will clearly show the recovery and is only a few weeks from completion, it may be worth asking your accountant to finalise it first. If it’s months away, lead with year-to-date figures instead.
Which loan types are kindest to a bad year?
Match the product to what your recent figures can support.
- Bank statement and low doc lending. These lenders size the loan on recent deposits and BAS, so a weak year two returns ago may not feature at all. See low doc business loans.
- Property-secured loans. Where you have equity in residential or commercial property, the security does much of the work, and a documented recovery is often enough on the cash flow side. Secured business loans cover the options.
- Asset and equipment finance. The equipment itself secures the debt, which can soften the focus on last year’s profit.
- Bank loans. Still worth trying if the bad year is clearly one-off and the current year is strong. Banks are usually the cheapest money and many assessors will listen to a well-documented explanation. If yours says no, that isn’t the end of it; declined by the bank walks through the next steps.
Before you approach anyone, the business borrowing power calculator gives a rough sense of what your current turnover and commitments support.
Mistakes that make a bad year look worse
- Restating the figures. If your accountant’s year-to-date numbers and your bank statements disagree, the assessor trusts neither.
- Applying everywhere at once. A string of credit enquiries on top of a weak year suggests urgency. Pick one or two well-suited lenders.
- Asking for too much. Requesting a loan sized on your best year rather than your current one invites a decline. Ask for what the recovery supports.
- Hiding the debt it left. Lenders see ATO debts, arrears and defaults through searches and statements. Disclose them with the plan you have in place.
- Waiting for the “perfect” file. A business with one bad year and six strong months has a good story to tell now.
Had a hard year? Talk to someone who reads the whole file
Plenty of the owners we hear from are coming off a difficult twelve months: a flood, a lost client, a health scare, a run of rising costs. A rough year is part of running a business, and it shouldn’t lock you out of finance when your recent trading says otherwise.
Our enquiry form takes roughly a minute, and asking doesn’t leave a mark on your credit history. We don’t hand your details around to dozens of funders, so you won’t be fielding calls from strangers. Someone on our team reads what you’ve told us, including the context behind last year’s numbers, and phones you to talk it through. Be straight about the figures and the cause; accurate answers let us point you to a lender that assesses the way your file needs, the first time.
Frequently asked questions
Will a lender decline me because of one loss-making year?
Not automatically. Banks often average two years of results or look closely at the weaker one, so a loss can reduce what they'll lend or push the file to a more senior assessor. Non-bank and fintech lenders that rely on recent bank statements may barely weigh it if the last six to twelve months look healthy.
Should I wait until I have a better year before applying?
Only if you don't need the money soon and the next set of accounts will clearly be stronger. Waiting can mean missing the opportunity the loan was for. Often the better move is to apply now with year-to-date figures that show the recovery, and choose a lender that assesses recent trading.
Who should write the explanation, me or my accountant?
Both have a role. You write the story in plain language because you lived it. Your accountant can add a short letter confirming the figures, quantifying one-off costs and stating the current year-to-date position. An accountant's confirmation carries weight because it's independent of the sale.
What counts as a one-off cost a lender might add back?
Costs that won't recur: a legal settlement, flood clean-up, a write-off of a bad debt from a customer that went under, relocation, a large one-time equipment repair. Lenders decide what they'll accept, so each item needs a source document, not just a label in the accounts.
Do I have to tell the lender about the bad year if they don't ask?
The lender will see it in your tax returns, financials or statements, so assume they'll find it. Raising it yourself with an explanation reads as candour. Leaving it for them to discover reads as concealment, and that's harder to recover from than the loss itself.
Can I still get a loan if the bad year left me with an ATO debt?
Yes, many owners do. An active ATO payment arrangement that you're keeping to is far easier to explain than an unmanaged balance. Some lenders specialise in businesses carrying tax debt, and a property-secured loan can sometimes be used to clear it outright.