Add-backs: where self-employed borrowing capacity is found

Business owners are told constantly that being self-employed makes borrowing harder. It makes it slower to assess, which is not the same thing. The gap between a good self-employed application and a poor one is usually a single step: whether anyone did the work of adding back.

What an add-back is

Your taxable income is deliberately reduced by expenses your accountant claims. Some of those expenses do not actually reduce the cash you have available to service a loan. Lenders will add a portion of them back before assessing you — but only the ones they are asked about, and only the ones their policy allows.

Commonly considered:

• Depreciation, because it is a non-cash expense.
• Additional superannuation above the compulsory rate.
• One-off or non-recurring expenses, where they can be evidenced as one-off.
• Interest on debts being refinanced or repaid as part of the transaction.
• Certain motor vehicle and home office expenses, depending on the lender.
• Net profit retained in the company, where you control the company.

That last one is the largest for many business owners, and the one most often missed. If you pay yourself a modest salary and leave profit in the company, several lenders will consider that retained profit as available income. Several others will not. Knowing which is which before you apply is most of the job.

Why applications skip it

Because it takes time. Identifying add-backs means reading the financials properly and writing an explanation the credit assessor can follow. Submitting the taxable income figure takes five minutes and earns the same commission.

That is the honest reason, and it is why we charge a fee for service rather than working purely on lender commission.

Full doc versus alt doc

Alt doc — verifying income from BAS, an accountant’s declaration or business bank statements rather than tax returns — is a legitimate, regulated product for borrowers whose returns do not reflect current trading. It is not a loophole.

But it usually means a lower maximum loan-to-value ratio and a higher rate. A great many self-employed borrowers end up on alt doc when full doc would have worked, purely because nobody did the add-back work first. Test full doc before accepting the trade-off.

Preparing before you borrow

1. Lodge on time. Overdue returns or ATO debt will stop most applications regardless of income.
2. Keep business and personal transactions in separate accounts.
3. Talk to your accountant in the financial year before you plan to borrow. Aggressive minimisation is expensive in the year being assessed.
4. Keep BAS lodgements current — they are the primary evidence in most alt doc assessments.

The best outcome for a business owner almost always comes from planning the year before the application, not the week of it.