How much can my business borrow? Debt service cover worked out step by step

Most Australian business lenders size a loan with two tests, and the lower answer wins. The cash flow test asks whether earnings cover all debt repayments with a margin, usually expressed as a debt service cover ratio (DSCR) of somewhere around 1.25 to 1.5 times or more, depending on the lender and risk. The security test asks how much the assets offered are worth after applying a loan-to-value ratio. Work out both before you apply and you will know roughly what is realistic, and what to change if the answer is too low.

This guide is part of the business loan application checklist. All ratios and rates are illustrative; each lender sets its own policy.

The cash flow test

DSCR = earnings available for debt service ÷ total annual debt repayments (principal and interest)

Lenders commonly start from EBITDA: earnings before interest, tax, depreciation and amortisation, from your financial statements. They then adjust it:

• add back one-off costs that will not recur (with evidence);
• subtract owner drawings or a notional wage if the owners are not paid a salary in the accounts (common for sole traders and partnerships);
• subtract tax payable, in some lenders' methods;
• use an average of two years, or the lower year, if earnings are volatile.

The repayments include all business debts: the new loan, existing loans, equipment finance, and sometimes an assumed repayment on overdraft limits.

Worked example 1: a company with a salaried owner

A plumbing company has EBITDA of $260,000, after paying the owner a market salary. It already pays $60,000 a year on equipment finance. The lender wants a DSCR of at least 1.5.

1. Maximum total repayments: $260,000 ÷ 1.5 = $173,333 a year
2. Less existing repayments: $173,333 − $60,000 = $113,333 a year available for the new loan
3. Monthly: $113,333 ÷ 12 = about $9,444
4. At 9% over 5 years, a monthly repayment of $9,444 supports a loan of about $455,000

The last step reverses the repayment formula: loan = repayment × (1 − (1 + r)^−n) ÷ r, with r = 0.75% a month and n = 60. You can check it by entering $455,000, 9% and 5 years into the repayment calculator; it returns about $9,444.

How the answer moves

The term is a powerful lever, but lenders only stretch it where the asset or purpose justifies it. A seven-year loan for equipment with a five-year life is unlikely to be approved.

Worked example 2: a sole trader whose profit includes their wage

A sole trader electrician shows EBITDA of $260,000 but takes $90,000 a year in drawings to live on. The lender deducts the drawings:

1. Adjusted earnings: $260,000 − $90,000 = $170,000
2. Maximum repayments at DSCR 1.5: $170,000 ÷ 1.5 = $113,333
3. Less existing $60,000: $53,333 a year, or about $4,444 a month
4. At 9% over 5 years: a maximum loan of about $214,000

Same EBITDA, less than half the borrowing capacity. This is why company and sole trader figures cannot be compared directly, and why lenders ask about personal living costs for unincorporated businesses.

The security test

Suppose the plumbing company offers a commercial unit valued at $600,000 with no existing mortgage, and the lender's policy for that property type is an illustrative 65% LVR:

• Security limit: $600,000 × 65% = $390,000

The cash flow test allowed $455,000, but security allows $390,000. Unless the company adds security (equipment, a GSA, a second property) or accepts part of the loan unsecured at a higher price, the realistic secured amount is about $390,000. The secured vs unsecured guide explains how lenders value different security.

Other things lenders weigh

• Trading history: many want two years for standard pricing.
• Trend: rising earnings help; one strong year after two weak ones may be averaged down.
• Customer concentration: one customer providing most revenue increases risk.
• Interest rate buffer: some lenders test repayments at a higher rate than the offer.
• Gearing: total debt compared with equity or EBITDA (for example, debt no more than a set multiple of EBITDA).
• Credit history: of the business and of the directors who guarantee.

How to increase what you can borrow

1. Clear or refinance small high-cost debts that consume repayment capacity. See the refinancing example.
2. Make sure one-off expenses are clearly documented so they can be added back.
3. Bring tax lodgements up to date so the latest year's figures can be used.
4. Offer appropriate security, or reduce the amount with a larger cash contribution.
5. Ask whether a longer term suits the asset.

Related guides

Low-doc lenders run the same test on estimated earnings; see low-doc business loans. To see how a rate change moves your capacity, compare fixed and variable pricing.

Frequently asked questions

What DSCR do Australian banks require?

There is no single number; it depends on the lender, industry, loan type and security. Ratios of around 1.25 to 1.5 or more are commonly discussed, but treat any figure as indicative and ask the lender for its policy.

Is EBITDA the same as profit?

No. EBITDA adds back interest, tax, depreciation and amortisation to net profit. It is a rough measure of cash generated before financing costs.

Do lenders count the new loan's interest in DSCR?

Yes, the full new repayment of principal and interest is included in the denominator.

My accounts show a loss because of depreciation. Can I still borrow?

Possibly. Depreciation is added back in EBITDA, so a business with a small accounting loss can still show positive cash earnings. The lender will want to see why.

Sources

• business.gov.au — financial statements and cash flow forecasting
• ATO — lodgement records lenders will check
• Reserve Bank of Australia — cash rate and business lending data
• ASIC Moneysmart — general guidance on borrowing and debt