Finance for trades and construction businesses

A trade business is one of the easiest commercial files to fund and one of the easiest to present badly. The security is real and recoverable, the work is usually there, and the earnings are almost always understated in the one document a lender reads first.

That last part is not an accident and it is not anyone's fault. A set of accounts prepared for the ATO is prepared to be conservative, and a trade business has more legitimate ways to be conservative than most: plant that depreciates fast, tools bought and written off in the year, a vehicle fleet, and a season where the work landed in July instead of June. Read as a credit case rather than as a return, the same business often carries considerably more than it was told.

What actually differs

Progress claims, retentions, and the money you have earned and cannot spend

You pay wages weekly or fortnightly, you pay suppliers on their terms, and you get paid on a progress claim after the work is inspected. Then a slice of what you have earned is held back anyway.

Retention is commonly around 5% of the contract value, deducted progressively from payments, with roughly half released at practical completion and the remainder at the end of the defects liability period, commonly six to twelve months later. Queensland is the only state that sets statutory limits: the QBCC caps retention and other security at 5% of the contract price before practical completion, reduced to 2.5% afterwards, and no more than 10% may come out of any single progress payment. Everywhere else it is a matter of contract.

For a business turning over $3m on 5% retention, that is $150,000 of money already earned that cannot pay a wage. It is an asset on the balance sheet and it does nothing for the cash cycle, which is why a working capital facility for a trade business should be sized against the retention book and the debtor ageing rather than against a round number.

The add-backs a trade business actually has

An add-back only counts if a credit assessor accepts it, which is a different question from whether it is arithmetically correct. These are the categories that come up most often in this sector and survive the assessment when they are evidenced.

The instant asset write-off is the one most often missed

For 2025-26 a business with aggregated turnover under $10m can immediately deduct the full cost of an eligible asset costing less than $20,000, per asset, where it was first used or installed ready for use between 1 July 2025 and 30 June 2026. Assets at or above the threshold go into the general small business pool instead, depreciating at 15% in the first year and 30% after that.

Used properly across a year of tool and plant buying, that can take a large amount of capital spending out of reported profit in a single year. The cash did leave the business, so the whole write-off is not an add-back. What is an add-back is the difference between expensing the asset in one year and the depreciation that would otherwise have applied across its working life, because that difference is a timing decision rather than a cost of trading. A credit team that understands the sector will normalise it. A file that does not raise it will simply be assessed on the smaller number.

And what will not go in

• The private-use portion of a vehicle or a phone, however it is described in the accounts.
• Wages paid to family members who do not work in the business, unless you are prepared for the question that follows.
• Tools and materials that will be bought again next year. Recurring is recurring.
• Anything a credit assessor cannot open a source document against.

What those add-backs are worth

Take the four categories above at the illustrative amounts in the table below, $60,000 in total. What that is worth depends entirely on what you are buying with it, because a facility written over twenty-five years supports far more debt per dollar of earnings than one written over five.

Two things worth taking from that. The first is the size of it: $60,000 of earnings nobody put in front of a lender is the difference between being told you can buy the yard and being told you cannot. The second is that the term does most of the work. The same earnings support $371,000 of a twenty-five year property facility and $189,000 of a five year equipment one, which is why matching the facility to the asset matters more than shopping the rate.

What a trade business actually finances

The most common structural error in this sector is funding the third of those with money designed for the fourth. A yard bought out of an overdraft that never returns to credit is term debt in the wrong instrument, and it costs more and reads worse than the facility it should have been.

Security, and why the plant is worth less than you think

A lender does not value your plant at what you would sell it for. It values it at what it would recover from a forced sale by someone who does not want it, in a market that knows why it is for sale. That is why an asset you paid $180,000 for two years ago can support far less than you expect, and why the earnings case matters even in a sector with real security behind it.

Where the business owns or is buying property, the position changes completely. Property is the security a commercial lender is most comfortable with, and an owner-occupier, generally meaning the business occupies the majority of the floor space, is usually the strongest position of all. Levels vary by lender and every lender sets its own.

The covenant that binds

Debt service cover is the number most commercial decisions turn on, and it is the one to model before you apply. But for a trade business the covenant that causes the most trouble after settlement is usually a working capital or current ratio test, because retentions and work in progress sit in the current assets while the overdraft sits in the current liabilities, and a big project can move both at once.

Read the covenant schedule in the letter of offer before you sign it, and test it against a bad quarter rather than a good one. Most owners first read their covenants in the year they breach one.

What the file needs

• Two to three years of financial statements and tax returns, plus current management accounts.
• The asset register, which is where the depreciation and the write-off argument is evidenced.
• A debtor ageing and a retention schedule, showing what is held, by whom, and when it is due for release.
• The work in hand: contracts signed, stages remaining, and what is out for tender.
• Details of every existing facility, because the new debt is tested on top of what the business already carries.
• For a premises purchase: the contract, and the current lease so the rent being replaced can be evidenced from both sides.

The acronyms, in one place

What we can and cannot tell you

Andorra Advisory Group is a commercial finance brokerage and advisory practice. We build the analysis and the documents, and we arrange the facility where you want us to. Nicholas Clunes: Credit Representative Number 530711 is authorised under Australian Credit Licence Number 387856. The advisory fee is fixed, quoted before the work starts, and payable regardless of whether finance is approved or what the analysis concludes. Where a lender pays commission on a facility it is paid to The Lending Lab Pty Ltd; it is not payable on every transaction and the amount is not ascertainable at the time of quoting. You are free to take the analysis to any broker or lender you like, at the same fee.

So no lender is named here and no policy is quoted. Every threshold is a level commonly seen, and every lender sets its own. We give no taxation advice, no legal advice and no financial product advice. Whether the instant asset write-off applies to your business, and how your vehicle and plant are best held, are questions for your registered tax agent, and contract and retention disputes belong with your solicitor.

The tax figures here are the ATO's published position for 2025-26 and thresholds change. Check the current position at ato.gov.au before you rely on it.

General information only. Not credit advice, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria.