What lenders mean by serviceability, and how they test yours

“It doesn’t service.” If you’ve ever been told that by a bank, you’ll know how final it sounds and how little it explains. The business is profitable, the repayments look affordable to you, and yet the numbers on the lender’s side apparently don’t work.

Serviceability is simply the lender’s name for affordability. But the way they measure it is stricter and more particular than most owners expect, and the gap between your view and theirs is usually where loans fall over. Understanding how the test is built lets you see the result coming, and often change it.

What does serviceability actually measure?

At its simplest, it’s a comparison between two figures:

Money available to repay debt ÷ All debt repayments, existing and new

If the first number is comfortably larger than the second, the loan services. If it’s only just larger, or smaller, it doesn’t.

Each half of that sum hides decisions the lender makes on your behalf. What counts as “available” money? Which repayments go on the bottom line? At what figure are they assessed? Lenders answer those questions differently, which is why one can approve a loan another rejects.

How do banks test serviceability?

Banks generally use your accountant-prepared financials and tax returns, and they tend to follow a sequence like this.

1. Start with profit, then adjust it

The starting point is usually net profit before tax. Banks then add back items that don’t represent cash leaving the business or that won’t continue after the loan:

• depreciation and amortisation
• interest on any debt being refinanced by the new loan
• documented one-off expenses
• in some cases, above-market wages paid to directors or family

The result approximates EBITDA, the earnings figure most ratios use. The add-backs entry goes through what’s commonly accepted.

2. Add up every commitment

Next comes the denominator. Banks include:

• the proposed loan’s repayments
• every existing business loan, lease and equipment finance repayment
• notional repayments on credit cards and overdrafts, usually calculated on the full limit even when the balance is zero
• commitments of related entities the bank considers part of the same group
• for directors and guarantors, personal home loans, car loans and cards

3. Stress the repayments

Most banks don’t use the repayment you’ll actually pay. They assess it at a buffered cost to make sure the loan survives rising costs or a soft patch. That’s why a loan that looks affordable at today’s figures can fail the test.

4. Compare against a minimum ratio

The result is usually expressed as a debt service coverage ratio. A ratio of 1.0 means earnings exactly cover repayments with nothing to spare. Banks want a margin above that, commonly somewhere around 1.25 to 1.5 times depending on the industry and loan, though each sets its own benchmark. Some also check interest cover, which Business Queensland’s ratio guide defines as net profit divided by interest expense.

How do non-banks and fintechs do it differently?

Lender type	Income they use	How the test works	Where it’s more forgiving
Major and regional banks	Two years of financials, year-to-date figures	Adjusted profit against buffered repayments, minimum coverage ratio	Lower cost; recognises strong long-term profit
Non-bank lenders	Latest financials or BAS, sometimes an accountant’s letter	Similar ratios, often with more flexibility on add-backs and recent trading	Weak prior year if current trading is strong
Fintech and online lenders	Recent bank statement deposits	New repayment kept to a modest share of average deposits; checks existing lender debits	No financials needed; quick
Private and property-secured lenders	Equity in the security and the exit plan	Light cash flow check; interest may be prepaid or capitalised	Short-term gaps where cash flow is thin

The Reserve Bank’s October 2025 bulletin on small business finance observed that a few lenders had lowered their serviceability benchmarks and that more small loans were being approved automatically. That loosening isn’t universal, but it does mean a decline from one lender says little about the market as a whole.

For fintech lenders, serviceability often lives entirely in your statements: average monthly credits, existing daily or weekly debits, and how low the balance runs. Our guide to how lenders read your bank statements explains those calculations.

A worked example: one business, two answers

Take an illustrative Adelaide joinery company, a Pty Ltd owned by two directors, wanting $280k over five years for a CNC machine.

From the latest financials:

• Net profit before tax: $142k
• Add back depreciation: $48k
• Add back interest on existing debt: $21k
• Add back a documented one-off cost (workshop flood clean-up): $26k
• Earnings available for debt: $237k

Commitments, as the bank counts them:

• Existing equipment finance: $54k a year
• Business credit cards, $40k combined limit, assessed as a notional repayment: $14k a year
• Proposed loan, at the bank’s buffered repayment: $78k a year
• Total assessed commitments: $146k

Result: $237k ÷ $146k = 1.62 times. That passes most bank benchmarks comfortably.

Now suppose the bank refuses the $26k flood add-back because the invoices weren’t supplied, and also counts $30k a year of repayments on a loan the directors guaranteed for a related property trust.

• Earnings available: $211k
• Commitments: $176k
• Result: 1.20 times, below many banks’ minimum

Same business, same machine, and the answer flips. The fix in this case is mostly paperwork: supply the flood invoices and show the property trust services its own loan from rent. Our DSCR calculator lets you run these scenarios on your own figures before a lender does.

Which hidden items shrink serviceability most?

Owners are often surprised by what counts against them.

• Unused credit limits. A $50k card with a zero balance can still be assessed as a monthly commitment.
• Guarantees. A guarantee for a family member’s or related company’s loan is a contingent liability that many lenders include.
• Short-term online loans. Daily or weekly repayments add up to large annual figures, and a lender stacks them all into the denominator.
• Directors’ personal debts. A large home loan or several car loans can drag down a company’s application where directors are guarantors.
• Low drawings for sole traders. If the profit figure is also your household income, lenders will deduct a realistic living cost before they see any surplus.
• Old figures. If the latest lodged return is your weakest year, the bank may assess on it even if this year is much better.

Not sure which of these applies to you? Send us the basics and someone will walk through how a lender is likely to read your numbers.

How can you improve serviceability before applying?

Some levers take minutes; others take a quarter or a financial year.

Quick wins

• Cancel or reduce credit card limits you don’t use.
• Ask for a longer loan term. Spreading the same loan over seven years rather than five lowers the annual repayment the lender tests.
• Supply source documents for every add-back you want counted.
• Disclose and explain guarantees, showing the guaranteed borrower meets its own repayments.

Medium-term changes

• Refinance expensive short-term debt into a longer facility, which can cut annual commitments sharply. See refinancing expensive short-term business debt.
• Get year-to-date accounts prepared if the current year is stronger than the last lodged one.
• Show that the purchase replaces an existing cost, such as subcontractors or hired equipment, so the lender can treat part of the repayment as self-funding.

Structural choices

• Offer property as security. It doesn’t change the ratio, but some lenders will accept a thinner margin when the loan is well secured.
• Split the need: an equipment loan secured by the machine plus a smaller working capital facility often services better than one large unsecured loan.
• Borrow less, or contribute more cash to the purchase.

If a bank offered a smaller amount than you requested, serviceability is usually why. Bank offered less than you asked for covers how to close that gap.

When does serviceability matter less?

Banks are often the cheapest source of business finance, and if your numbers pass their test, their offer deserves serious attention. But not every loan is assessed on ongoing cash flow.

Short-term property-secured lending, such as bridging or caveat loans, focuses on the value of the security and a credible exit: a property sale, a refinance, a contract payment due in three months. Interest may be prepaid from the loan itself, so there’s no monthly repayment to service. These loans suit a defined gap rather than a business that can’t afford its debt, and the total cost in dollars should be weighed carefully. The business borrowing power calculator is a useful sense-check before you go down that route.

Not sure your numbers service? Let a person check them

Serviceability sounds technical, but most of the time it comes down to a few figures: what the business earns, what it already owes, and how the new loan is shaped. Change one of those and the answer often changes with it.

That’s the conversation we’re set up to have. Getting it started takes a minute on our short form, and there’s no credit check involved in asking. We won’t pass your information around a crowd of lenders or leave you dodging calls. Someone experienced reads your enquiry and phones you to look at how a lender would assess your business. Give us your real profit and current repayments, including the awkward ones, so the first option we suggest is one that genuinely fits.

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