How much can a business actually borrow?

Ask most business owners how much their business can borrow and you get a number based on turnover. Ask a broker and you often get a number based on what a lender said last time. Neither is how it works. A commercial credit team sizes a facility from one thing: the cash the business can reliably produce, tested against a repayment it has decided to assume rather than the one you were quoted.

That sentence contains four separate decisions, and each one moves the answer. This piece walks through all four with real arithmetic, so you can work out roughly where you sit before you ask anyone for anything.

It starts with earnings, and not the ones in your tax return

The starting figure is adjusted earnings: cash profit before interest, tax, depreciation and amortisation, after the accounts have been rebuilt to show what the business actually produces on an arm's-length basis. Two adjustments matter most and they pull in opposite directions.

Upward, a lender will add back genuinely one-off costs and expenses personal to the current owner: the vehicle nobody needs, the one-time legal bill, the travel that was really a holiday. Downward, and this is the one owners forget, a lender puts back a market salary for every working owner. If two directors take $60,000 each in wages but do jobs that would cost $120,000 each to replace, adjusted earnings falls by $120,000 before anything else happens.

Then the repayment is tested at a rate you were not quoted

This is where most self-made estimates fall apart. A lender does not test your repayments at the rate on the term sheet. It applies an assessment rate, typically two to three percentage points above the actual rate, so the facility still services if rates move. Some lenders also assume a shorter term than the one offered.

The effect is larger than people expect. On a $1,000,000 facility over ten years, the difference between a 7% quoted rate and a 10% assessment rate is roughly $19,000 a year of extra assumed repayment. On a 1.5x cover requirement, that is about $29,000 of earnings you need to find before the numbers work, purely because of a rate nobody is charging you.

Then the existing debt joins the queue

New borrowing is never assessed alone. Every existing commitment counts against the same earnings: the equipment finance, the overdraft, the vehicle leases, the ATO payment plan if there is one. A business with $200,000 of adjusted earnings and $80,000 of existing annual commitments is not borrowing against $200,000. It is borrowing against what is left after the $80,000, which changes the answer completely.

This is the most common reason a capacity estimate turns out to be wildly optimistic. The owner modelled the new facility. The lender modelled the whole balance sheet.

And then one covenant binds before the others

Most commercial facilities carry two or three covenants at once, and the facility is sized by whichever bites first. Debt service cover is the famous one: adjusted earnings divided by total annual repayments, usually needing to land somewhere between 1.25x and 1.5x. But leverage, meaning total debt divided by earnings, frequently binds earlier, particularly where the borrowing is large relative to a modest earnings base. Interest cover is a third.

Working out which one binds is the difference between a useful number and a guess. A business can pass debt service comfortably and still be declined because total debt sits at four times earnings against a three times ceiling. Nothing about the repayment was the problem.

So what is the actual number?

Here is the arithmetic end to end for a business with $500,000 of reported profit.

Note what happened between the first line and the last. Reported profit of $500,000 became $385,000 of usable cash, and the two adjustments that did most of the damage were the owners' market salary and the existing commitments. Neither appears in a turnover-based estimate at all.

Where this arithmetic stops

Everything above assumes the earnings figure is right. That is the assumption a calculator cannot test and the one a lender will not take on trust. If your adjusted earnings are overstated by $50,000, every number downstream is wrong, and the facility you were counting on is roughly $210,000 smaller than you thought.

Which is the honest limit of any tool, including ours. A calculator takes what you type at face value. Working out whether those are the earnings a lender will adopt is the part that needs the source documents.