Key Takeaways
- Commercial loan borrowing power is determined by two main constraints: serviceability (whether your cash flow can support the repayments) and security (how much the property or asset can support against an LVR limit). The lower of these two figures is the practical maximum.
- Borrowing power varies meaningfully between lenders for the same borrower, sometimes by 20% to 40%, because each lender has different policies on income recognition, buffers, LVR limits, and appetite for specific deal types.
- Eight main factors shape borrowing power: income strength, existing commitments, property type and security, deposit available, borrower entity structure, industry and trading history, personal credit position, and the loan structure being sought.
- Borrowers can usually increase their borrowing power by addressing specific issues before applying: clearing personal commitments, lodging current tax returns, presenting clean add-back schedules, and choosing lenders whose policies fit the borrower’s profile.
What ‘Borrowing Power’ Actually Means
Borrowing power is the practical answer to the question every commercial borrower starts with: how much will lenders actually lend me on this deal? It is not a single number; it is the result of an interaction between cash flow constraints, security constraints, deposit position, borrower profile, and the specific lender’s policy. The same borrower with the same financial position can have different borrowing power figures from different lenders, sometimes by hundreds of thousands of dollars on the same deal.
Understanding what shapes borrowing power matters because it helps borrowers position their applications well and choose lenders whose policies align. A borrower who applies to one lender and is offered $1.2 million may be offered $1.5 million by a different lender, or declined by a third, with no change to the underlying financials. Hence, knowing the factors that drive borrowing power and how they interact is the difference between accepting a marginal first offer and getting the right deal from a suitable lender.
This guide explains the factors that shape commercial loan borrowing power in Australia, why borrowing power differs between lenders, and how borrowers can improve their position. If you want to assess your specific borrowing power across multiple lenders, the Loanworx team can help you understand your borrowing power on a specific deal and identify which lenders’ policies are most likely to support the loan amount you need.
The Two Main Constraints on Borrowing Power
Commercial borrowing power is shaped primarily by two constraints. Most loans are limited by one or the other; very few are equally limited by both. Understanding which constraint binds first for a specific deal helps the borrower focus their preparation effort productively.
Serviceability Constraint
The serviceability constraint is the maximum loan amount the borrower’s cash flow can support, after the lender’s stress-test buffer is applied. If the borrower has $80,000 of annual surplus cash flow (income less commitments) and the lender’s stressed assessment rate results in a $1,000 per $100,000 borrowed cost, the serviceability ceiling is around $670,000. The exact number depends on the lender’s policy variables; the principle is that cash flow caps how much can be borrowed.
Security Constraint
The security constraint is the maximum loan amount the property or asset can support, based on its valuation and the lender’s LVR limit. A $1.5 million property with a 70% LVR ceiling supports a maximum loan of $1,050,000. The borrower’s cash flow may support more or less than this, but the lender will not lend above the LVR ceiling regardless of how strong the serviceability is.
Which One Usually Binds First
The constraint that binds first depends on the deal. Investment property deals (where the rental income is recognised but heavily shaded) often hit the serviceability ceiling before the LVR ceiling. Owner-occupier deals with strong business cash flow often hit the LVR ceiling before serviceability. SMSF deals frequently hit both ceilings together because both serviceability buffers and LVR limits are tightened. Identifying which constraint binds first helps the borrower focus on improving the binding one rather than the non-binding one.
The Practical Maximum
The practical maximum loan amount is the lower of the serviceability and security ceilings. A borrower with serviceability capacity for $1.5 million but security capacity for only $1.2 million has a practical maximum of $1.2 million. Conversely, a borrower with security capacity for $2 million but serviceability for only $1.1 million has a practical maximum of $1.1 million. Both constraints need to be met; meeting only one is not enough.
Factor 1: Income Strength
Income strength is the largest single driver of serviceability and therefore of borrowing power for most deals. The borrower’s income determines how much surplus cash flow is available to support new debt, which determines the serviceability ceiling.
How Different Income Types Affect Borrowing Power
Lenders recognise income types differently, which means the same gross income figure can produce different borrowing power outcomes depending on the source. PAYG salary is usually recognised at 100%. Self-employed income is typically recognised based on tax return figures with add-backs applied. Commercial rental income is shaded by 20% to 40%. Trust distributions and dividend income are typically averaged across one to two years. Investment property rental income is shaded similarly to commercial rent.
Consistent Income Versus Variable Income
Lenders prefer consistent income because it produces a more predictable serviceability outcome. A borrower with a stable salary of $150,000 per year for 5 years has stronger borrowing power than a borrower with self-employed income averaging $150,000 but ranging from $100,000 to $200,000 across recent years. The variability adds uncertainty to the assessment and typically results in more conservative recognition.
Recent Versus Historical Income
Most lenders use the most recent year’s income for borrowers with stable or growing income, but apply a two-year average for borrowers with declining income or recent volatility. This means borrowers with strengthening trading positions benefit from lodging current tax returns before applying; borrowers with weaker recent years may want to wait until trading recovers if timing permits.
Factor 2: Existing Debt and Commitments
Existing commitments reduce the surplus cash flow available for new debt, thereby directly reducing borrowing power. This is one of the most actionable factors borrowers can influence before applying.
How Existing Debt Affects Capacity
All existing loans, credit card balances, and ongoing commitments are subtracted from the borrower’s surplus before assessing new borrowing. A $500 monthly home loan repayment reduces serviceability by $500 per month, thereby reducing achievable new borrowing by approximately $80,000 under typical assessment parameters. Multiple existing commitments compound.
Credit Cards Specifically
Credit cards are assessed at minimum monthly repayment plus a buffer, even if paid in full each month. A $20,000 credit card limit (even at zero balance) typically reduces serviceable borrowing capacity by $50,000 to $80,000 at typical lender assessment rates. Reducing credit card limits before applying is one of the most effective borrowing power improvements available to most borrowers.
Personal Guarantees on Other Borrowings
Personal guarantees provided for other parties’ borrowings (e.g., a director who has guaranteed another company’s loan or a parent who has guaranteed a child’s home loan) are typically included on the commitment side of the calculation. The borrower may not have made any actual payments, but the contingent liability counts. Borrowers should review what guarantees they have provided before applying and consider whether any can be released.
Household Living Expenses
Personal living expenses are deducted from individual borrowers’ income in the serviceability calculation. Lenders typically use the higher of the borrower’s declared expenses or a benchmark figure (such as the Household Expenditure Measure). Borrowers with high discretionary spending, as shown in bank statements, may have higher assessed expenses than they expect, reducing borrowing power.
Factor 3: Property Type and Security
The property or asset being financed affects borrowing power through the LVR ceiling. Different property types attract different LVR limits, which directly translates into different borrowing power on the same purchase price.
LVR Variation by Property Type
Standard commercial property (offices, warehouses, retail in established locations) typically supports LVRs of 65% to 75%. Specialised property (childcare centres, service stations, hospitality, healthcare) typically attracts tighter LVRs of 55% to 65%. Investment property is usually capped 5% to 10% below comparable owner-occupier LVRs. The difference in LVR between the two property types can shift borrowing power by hundreds of thousands of dollars on a $2 million purchase.
Valuation Versus Purchase Price
The LVR ceiling is calculated against the lower of the valuation or purchase price. If the property is purchased for $1.5 million but is valued at $1.4 million, the LVR ceiling is based on the $1.4 million figure. This is why valuation surprises can reduce borrowing power even when serviceability is comfortable. Borrowers should anticipate the possibility of a valuation below the purchase price, particularly for specialised property or properties in softening markets.
Additional Security Options
Borrowers near the LVR ceiling sometimes increase borrowing power by offering additional security beyond the primary property. This can include other commercial or residential property, business assets, or guarantees from other entities. Additional security expands the effective security base; whether it makes sense depends on the borrower’s wider position and the lender’s appetite for cross-collateralisation.
Factor 4: Deposit Available
The deposit position affects borrowing power both directly (by determining the loan amount required relative to the purchase price) and indirectly (through the LVR position, which affects serviceability buffers and pricing tiers).
Deposit as a Lever for Pricing Tiers
Many lenders structure pricing and serviceability tiers around specific LVR thresholds (often 60%, 65%, 70%, 75%). Just under a threshold can produce materially better terms than just over it. A borrower close to a threshold often benefits from finding additional deposits to drop into the lower tier, even if the additional cash strain is modest.
Sources of Deposit
Acceptable deposit sources include accumulated cash savings, equity in existing property, sale proceeds from other assets, business profit distributions, and (sometimes) gifts from family members. Each source has documentation requirements, and the lender needs to verify that the funds are not borrowed. AUSTRAC anti-money-laundering rules require lenders to verify the deposit source clearly, which means unexplained large deposits or recent transfers usually attract scrutiny.
The 100% LVR Question
Genuine 100% LVR commercial loans are rare and typically only available with substantial additional security or guarantees from related parties. Most commercial deals require some deposit, with 30% being the most common minimum (i.e., 70% maximum LVR). Borrowers wanting to maximise leverage should focus on optimising within typical LVR ranges rather than pursuing structures that strip out the deposit entirely.
Factor 5: Borrower Entity Structure
How the borrower is structured (individual, company, trust, SMSF, partnership) affects how lenders assess income, commitments, and security. Different structures can produce different borrowing-power outcomes for the same underlying financial position.
Individual Borrowers
Individuals usually have the simplest serviceability assessment, but cannot benefit from some of the structural flexibility available to companies or trusts. Individual borrowers’ personal living expenses count fully; their other commitments count directly; and their borrowing power is calculated against their personal cash flow.
Company Borrowers
Companies can borrow against the entity’s cash flow, with directors providing personal guarantees. Company borrowing power is typically assessed against the business’s EBITDA or normalised net profit rather than directors’ personal income, which can produce stronger outcomes for profitable businesses. Directors’ personal financial positions are also assessed, but as guarantors rather than primary borrowers.
Trust Borrowers
Trusts are administratively more complex but, in most cases, produce borrowing outcomes similar to those of companies. The trust’s income, the trustee’s authority, and the beneficiaries’ positions all factor into the assessment. Discretionary trusts sometimes face additional caution because there is no contractual entitlement for beneficiaries to receive distributions.
SMSF Borrowers
SMSFs face the tightest borrowing power constraints. LVRs are typically capped at 70% for commercial property (sometimes lower), serviceability is assessed against the fund’s projected rental and contribution income, and the limited recourse nature of LRBA limits lender flexibility. SMSF borrowing power is usually 20% to 30% lower than equivalent personal or company structures for the same property.
Factor 6: Industry and Trading History
For business borrowers, the industry and trading history shape how the lender assesses the reliability of the underlying cash flow. Some industries support stronger borrowing power than others, and shorter trading histories typically attract tighter terms.
Industry Risk Perception
Lenders rank industries by their risk perception, which affects both LVR limits and serviceability treatment. Stable industries (professional services, established healthcare, infrastructure-supported businesses) typically support stronger borrowing power. Volatile industries (hospitality, construction, retail in turnaround) often face more conservative assessment. Industry classification is sometimes negotiable around the edges but is generally fixed.
Trading History Requirements
Most commercial lenders prefer to see one to two years of trading history before lending against business cash flow. Newer businesses with less than 12 months of trading typically have less borrowing power, as lenders rely more heavily on directors’ personal positions and any additional security. After two years of stable trading, borrowing power usually expands materially as the underlying business position becomes the primary basis for assessment.
Growth Versus Stability
Strong recent growth is positive but may be discounted by lenders concerned it will not continue. A business with a stable $200,000 annual profit over 3 years typically has stronger borrowing power than a business with $50,000, $100,000, or $300,000 in annual profit over the same period, even though the averages are similar. Lenders favour predictability over absolute size in many cases.
Factor 7: Personal Credit Position
The borrower’s credit history and credit score affect both lenders’ willingness to approve the deal and the terms offered. Personal credit issues can reduce borrowing power directly (by triggering tighter assessment) or indirectly (by limiting which lenders will consider the deal).
Clean Credit
Borrowers with clean credit (no defaults, no overdue payments, no recent inquiries beyond reasonable shopping) typically achieve the strongest borrowing power and the most competitive terms. Most major lenders treat clean credit as a prerequisite for their preferred pricing tiers.
Credit Inquiries
Recent credit inquiries (from multiple loan applications in a short period) can damage borrowing power even without any defaults. Lenders see clusters of inquiries as a sign of either rate shopping or financial pressure, and they sometimes apply tighter assessment criteria as a result. Borrowers should avoid lodging multiple applications simultaneously; a specialist commercial broker can usually obtain indicative offers without triggering formal credit inquiries on directors’ files.
Defaults and Adverse History
Defaults, judgments, bankruptcy history, or other adverse credit events materially reduce borrowing power. Some lenders will not consider deals involving any recent defaults; others offer specialized programs for borrowers with credit issues at materially higher rates. Borrowers with adverse history need to focus on the specific lender pool that will consider their position.
Factor 8: Loan Structure
The structure being sought (term, interest-only periods, balloon payments, fixed versus variable) affects borrowing power through the assessment repayment used in serviceability calculations.
Term Length
Longer loan terms result in lower assessment repayments and therefore support greater borrowing power. A 25-year amortisation produces a lower monthly repayment than a 20-year amortisation for the same loan amount, which means more loan can be supported by the same cash flow. Borrowers near the serviceability edge can sometimes shift into approval territory by accepting a longer term, though this increases total interest paid.
Interest-Only Periods
IO periods reduce regular repayments during the IO phase. However, lenders typically assess serviceability against both the IO repayment and the post-IO P&I repayment, so IO does not necessarily increase borrowing power as much as borrowers expect. The benefit is primarily cash-flow flexibility during the IO period, rather than expanded borrowing capacity.
Balloon Payments
Balloon structures reduce regular repayments by deferring part of the principal to maturity. Like IO, this can support stronger serviceability over the loan’s life, but lenders typically include the balloon-refinance position in their assessment. Whether balloons increase borrowing power depends on the specific lender’s policy.
Why Borrowing Power Differs Between Lenders
The same borrower with the same financial position can receive materially different borrowing power figures from different lenders. Understanding why helps borrowers route applications to lenders most likely to approve the required loan amount.
Different Income Recognition Policies
Each lender has its own policy on how add-backs are accepted, how rental income is shaded, how recent income is weighted versus historical income, and how owner adjustments are treated. The same borrower’s recognisable income can vary by 10% to 20% between lenders. Why some lenders say yes when others say no explores how lender assessment philosophies shape what they look at and accept, which is part of why borrowing power varies even when the underlying borrower is the same.
Different Buffer Sizes
Lenders apply different buffers above the loan rate when assessing serviceability. A lender using a 2.5% buffer produces a meaningfully higher borrowing power figure than a lender using a 3.5% buffer, on the same income. APRA-regulated lenders apply similar buffers to residential lending, but commercial lending buffers vary more widely across lenders.
Different LVR Policies
Different lenders apply different LVR ceilings on the same property type. A lender comfortable with the property type at 75% LVR supports more borrowing power than a lender restricting that type to 65%. Specialist lenders sometimes go higher on specific niches; major banks may be more conservative on segments they treat as marginal.
Different Industry Appetites
Lenders’ appetites for the industry shift over the credit cycle. A lender currently growing exposure in a segment may apply a lighter assessment than a lender pulling back from the same segment. Two lenders looking at the same borrower in the same industry can produce different outcomes because their current appetite for that industry differs.
Different Internal Workarounds
Some lenders have internal policy workarounds for marginal deals (specialist credit committees, deal-by-deal overrides, segment-specific exception processes). Others apply policy rigidly. The same borderline borrower can be approved by a lender with flexible internal processes and declined by a lender that applies policy strictly.
A Worked Example: Same Borrower, Three Lenders
To make the variation concrete, consider a hypothetical business owner: 45-year-old director of an established Pty Ltd company with $400,000 annual turnover, $130,000 EBITDA, no personal debt other than a $25,000 credit card limit, looking to buy a $1.6 million commercial property for owner-occupier use, with a $480,000 deposit available.
Lender A: Major Bank
Conservative income recognition (uses 1.8 years’ EBITDA averaged: $120,000), 3.0% serviceability buffer, 65% LVR cap on owner-occupier commercial. Serviceability ceiling: approximately $1.0 million. Security ceiling: 65% of $1.6 million = $1.04 million. Practical borrowing power: $1.04 million. The deposit required is $560,000, which is $80,000 more than the borrower has available. This lender would either reduce the loan amount or decline.
Lender B: Second-Tier Bank
Moderate income recognition (uses most recent EBITDA: $130,000), 2.75% serviceability buffer, 70% LVR cap on owner-occupier commercial. Serviceability ceiling: approximately $1.18 million. Security ceiling: 70% of $1.6 million = $1.12 million. Practical borrowing power: $1.12 million. The required deposit is $480,000, which exactly matches the amount the borrower has available. This lender would approve the deal at $1.12 million.
Lender C: Specialist Commercial Lender
Flexible income recognition (uses $130,000 EBITDA plus $15,000 in justified add-backs: $145,000), 2.5% serviceability buffer, 75% LVR cap on owner-occupier commercial in the borrower’s industry. Serviceability ceiling: approximately $1.40 million. Security ceiling: 75% of $1.6 million = $1.2 million. Practical borrowing power: $1.2 million. The deposit required is $400,000, which is $80,000 less than the borrower has available. This lender would approve the deal at $1.2 million with a surplus deposit.
The Variation in Practice
The same borrower has practical borrowing power ranging from approximately $1.04 million (Lender A) to $1.2 million (Lender C), a difference of $160,000, or 15% of the loan amount. None of these lenders is wrong; each is applying its own policy correctly to the same borrower. The borrower’s job is to identify which lender offers the most suitable outcome for the specific deal, usually by working with a specialist broker who knows the policies of multiple lenders.
Practical Strategies to Increase Borrowing Power
Several actions consistently improve borrowing power outcomes. Each is more or less applicable depending on the borrower’s specific position.
Reduce Credit Card Limits
Reducing or closing unused credit card limits is the single most actionable improvement for most borrowers. Cutting a $25,000 limit to $10,000 can increase serviceable borrowing power by approximately $50,000 to $60,000 at typical assessment rates. The reduction should be done at least 30 days before applying to ensure it appears on the credit file.
Clear Small Personal Loans
Personal loans, car loans, and other small commitments each reduce serviceability. Where the borrower has cash available, paying out small loans before applying for the commercial loan frees up serviceability headroom that can be redirected to the commercial loan. The math should be checked: paying out a $30,000 personal loan to free up $50,000 of borrowing capacity is usually a good trade.
Lodge Current Tax Returns
Current tax returns let lenders use the most recent income figures. Borrowers with growing income particularly benefit; older tax returns understate current capacity. Lodging the current year’s returns before applying often improves the assessed income by 10% to 20% for growing businesses.
Present Clean Add-Back Schedules
Working with an accountant to prepare a structured add-back schedule, with documentation for each item, often increases the recognised income by $10,000 to $50,000 or more. The schedule should be ready at lodgement rather than prepared reactively as the lender asks questions.
Choose the Right Lender
Routing the application to lenders whose policies fit the borrower’s profile is one of the most important strategic decisions. A specialist commercial broker familiar with multiple lenders can usually identify which lender will produce the strongest outcome for a specific borrower without lodging multiple formal applications. This avoids damaging credit through multiple inquiries while still optimising the outcome.
Consider Additional Security
Where the LVR ceiling is the binding constraint, additional security from other property or assets can expand the available borrowing. This is a structural decision with consequences (the additional security becomes tied to the loan), but it is sometimes necessary to support the loan amount needed. Discussing this with the lender or broker upfront helps the borrower decide whether to offer additional security.
Optimise the Loan Structure
Extending the loan term, adding an interest-only period, or accepting a balloon structure can all increase borrowing power by reducing the assessment repayment. Each comes with trade-offs (longer terms increase total interest, IO periods carry step-up risk, balloons require refinancing at maturity). The right structural choice depends on the borrower’s wider plans rather than maximising borrowing power alone.
Where to Read About Borrowing Capacity Generally
While the specific mechanics differ between commercial and consumer lending, the underlying principles around what lenders assess (income, expenses, savings, credit history) are similar. Understanding the consumer-context framing of borrowing capacity helps borrowers see the pattern that applies in commercial settings, too.
ASIC’s MoneySmart guide on what lenders look at and how to improve approval chances at moneysmart.gov.au sets out the common reasons lenders decline applications, what to do if rejected, and practical steps to improve approval chances. While focused on consumer lending, the underlying assessment principles (income, expenses, savings, credit position) apply directly to commercial loan borrowing power, with the additional commercial considerations of business cash flow and security adequacy layered on top.
Frequently Asked Questions (FAQs)
1. How is commercial borrowing power different from residential?
Commercial borrowing power involves more variables than residential borrowing power: business income recognition, add-backs, commercial property valuation methodologies, industry risk perception, and lenders’ appetite for specific segments. The assessment is typically more case-by-case than residential lending, with more lender judgement involved. As a result, the variation in borrowing power between lenders is wider in commercial than in residential lending, with the same borrower potentially seeing differences of 20% to 40% between lenders.
2. Can I find out my borrowing power before formally applying?
Yes, through indicative offers from suitable lenders. A specialist commercial broker can usually obtain indicative views from two or three lenders based on a one-page deal summary, without lodging formal applications or triggering credit inquiries on directors’ files. The indicative offers provide a realistic view of borrowing power and the available terms, which informs the decision on where to lodge the full application.
3. Will reducing my credit card limit really increase my borrowing power?
Yes, often by more than borrowers expect. Lenders typically assess credit card commitments based on the minimum monthly repayment plus a buffer, even if the card is paid in full each month. A $20,000 credit card limit (even at zero balance) typically reduces serviceable borrowing capacity by $50,000 to $80,000 at typical assessment rates. Cutting unused limits before applying is one of the highest-return actions most borrowers can take.
4. How much do different lenders vary in their borrowing power calculations?
Variations of 20% to 40% on the same borrower are common in commercial lending. The same business owner with the same financial position can be offered $1.0 million by one lender, $1.2 million by another, and $1.4 million by a third. The variation comes from policy differences on income recognition, add-back acceptance, buffer sizes, LVR limits, and industry appetite. None of the lenders is wrong; they are applying different policies to the same borrower.
5. Does the property type affect my borrowing power?
Yes, materially. Standard commercial property (offices, warehouses, retail) typically supports an LVR of 65% to 75%. Specialised property (childcare, service stations, hospitality) typically attracts tighter LVRs of 55% to 65%. The same purchase price produces different maximum loan amounts depending on the property type. Buyers comparing properties should factor this into their analysis.
6. Can I borrow more by extending the loan term?
Yes, often by 10% to 20% on serviceability-constrained deals. Longer terms produce lower assessment repayments, which support higher borrowing capacity. A 25-year term produces a lower assessment figure than a 20-year term, increasing how much the same cash flow can support. The trade-off is a higher total interest over the loan’s life. For borrowers near the serviceability edge, extending the term can shift the deal into approval territory, with extra repayments later effectively shortening the loan in practice.
7. Does SMSF borrowing have lower borrowing power than personal borrowing?
Generally, yes, by 20% to 30% for equivalent property purchases. SMSF lending under LRBA carries tighter LVR limits (often capped at 70% for commercial property, sometimes lower), more conservative serviceability assessment, and limited recourse provisions that constrain lender flexibility. The same property purchased personally typically allows for more borrowing than the same property purchased through an SMSF, though the SMSF structure may still suit the borrower’s broader tax and retirement planning objectives.
The Bottom Line
Commercial loan borrowing power is shaped by two main constraints (serviceability and security) interacting with eight underlying factors: income strength, existing commitments, property type, deposit position, borrower entity structure, industry and trading history, personal credit, and loan structure. Each factor can be influenced to some degree, and their interaction determines the practical maximum loan amount any specific lender will offer.
For most borrowers, the smartest approach is to understand which constraint binds first on the specific deal, address the actionable factors that improve borrowing power (credit card limits, current tax returns, clean add-back schedules), and route the application to lenders whose policies fit the borrower’s profile. A specialist commercial broker can usually identify which lender will deliver the strongest outcome for a given borrower without having to lodge multiple formal applications. Borrowing power varies widely between lenders, so the choice of lender often matters as much as the underlying financial position.
