The jargon, translated
What does the bank actually mean?
Every term here is explained the way we use it in real files: what it means in plain English, and why a lender cares about it. If a term shows up in one of our reports, models or articles, its meaning is on this page.
The credit metrics
Debt service cover ratio (DSCR)How many times a business's cash earnings cover its total debt repayments, principal and interest included. The first number a credit assessor looks for.Interest cover ratio (ICR)How many times earnings cover the interest bill alone, ignoring principal. A quick read on whether debt costs are strangling the business.ServiceabilityWhether a business can pay a proposed debt back out of its own earnings, tested the way a credit team tests it, not the way a turnover-and-rate calculator guesses it.Assessment rateThe higher interest rate a lender uses when testing whether you can afford the debt. Always above the rate you are actually offered.CovenantA financial condition attached to a facility that the business must keep meeting after settlement, such as a minimum DSCR or maximum leverage.Covenant headroomThe gap between where the business actually sits and the covenant limit. Headroom is what keeps a bad quarter from becoming a bank problem.Sensitivity analysisRe-running the numbers with one input moved at a time, usually rates or revenue, to see exactly where the deal starts to break.Stress testDeliberately making the numbers worse, higher rates, lower revenue, slower collections, to check the business still stands.Borrowing capacityThe maximum debt a lender's own method says you can carry. It moves with how well your earnings are evidenced, not just with what you earn.Debt capacityThe commercial version of borrowing capacity: how much total debt the business's cash flows can support across every facility it carries.Three-way forecastOne model linking profit and loss, balance sheet and cash flow, so a change in any one flows through the other two. The format banks trust.Sources and uses of fundsThe two-column table showing where every dollar of a deal comes from and where every dollar goes. If it does not balance, the deal has a hole.
The earnings picture
EBITDAEarnings before interest, tax, depreciation and amortisation: the standard starting point for comparing what a business generates from trading.Adjusted EBITDAEBITDA after the corrections: real owner wages in, genuine one-offs out, related-party deals repriced to market. The number deals should be priced on.Add-backsExpenses added back to profit on the claim they will not continue under a new owner. Some are real. The unevidenced ones sink applications.Earnings normalisationThe whole discipline of restating reported profit to what an arm's-length owner would actually earn, with every restatement evidenced.Owner's market salary adjustmentPutting a realistic wage for the owner's actual job back into the numbers. The most commonly missed cost in small business earnings.Related-party transactionsDealings between the business and its owners' other entities, rent, loans, management fees, priced however the family wanted, not at market.Working capitalThe cash tied up in running the business day to day: stock on the shelf plus invoices owed to you, minus what you owe suppliers.Completion adjustmentThe price adjustment at settlement that trues up the working capital actually handed over against the level the deal assumed.Maintenance capexWhat must be spent on equipment just to keep the business running at its current level. The cost that EBITDA pretends does not exist.Management accountsThe internal monthly or quarterly figures a business runs itself on, fresher than the year-end statements but produced without external review.Business activity statement (BAS)The GST return lodged with the ATO. Because it is a legal declaration of actual turnover, it is one of the strongest checks on claimed revenue.ATO small business benchmarksThe ATO's industry-by-industry ranges for costs and margins, built from real tax returns. A free, independent sanity check on any business's numbers.EBITDAOEarnings before interest, tax, depreciation, amortisation and the owner's remuneration. Useful, and easy to read as more than it is.
The deal and the documents
Going concernA business sold as a live, operating whole, trading, staffed, stocked, rather than as a collection of assets. Most business purchases are structured this way.GoodwillThe part of a purchase price above the identifiable assets: what you pay for the name, the customers and the earning power itself.Personal Property Securities Register (PPSR)The national register of security interests over equipment, vehicles, stock and other personal property. Where you learn what a seller's assets already secure.Personal guaranteeYour personal promise to repay the business's debt if the business cannot. Standard in SME lending, and the reason the corporate veil is thinner than it looks.Information memorandumThe structured document that presents a business and its numbers to lenders, investors or partners in the order sophisticated readers expect.Funding requestThe written case that accompanies a finance application: the deal, the borrower, the numbers and the ask, laid out the way an assessor reads.Vendor financeThe seller leaves part of the price in the deal as a loan you repay over time. Common in business sales, and read carefully by lenders.Franchise agreement termHow long you have the right to operate the store. It usually caps how long a lender will write the loan for.Lender accreditationA lender's internal approval of a franchise system, which lifts how much they will lend against it and how fast.Term sheetA lender's written outline of the facility it is prepared to offer, ahead of formal approval.Credit paperThe internal document a lender writes about your deal, and the thing an approval is actually given on.
The facilities
Loan to value ratio (LVR)The loan amount as a percentage of the lender's assessed value of the security behind it. The security-side twin of the servicing tests.Second mortgageA loan secured against property that already secures another lender, ranking behind them. Faster and looser than bank money, and priced accordingly.Caveat loanVery fast, very short-term lending secured by a caveat over property. Among the most expensive debt a business can carry.Invoice financeBorrowing against invoices you have issued but not yet been paid for, turning the debtor book into working capital.Equipment and asset financeLending tied to a specific income-producing asset, the truck, the machine, the fit-out, with the asset itself as security.OverdraftA revolving limit on the trading account that flexes with the cash cycle. Working capital cover, not a way to fund long-term assets.Cross-collateralisationWhere one security secures more than one facility, so a problem in one part of your position reaches into the others.Cash flow lendingLending advanced against what a business earns rather than against an asset the lender can sell.General security agreement (GSA)Security taken over all of a company's present and future assets, registered on the PPSR.RefinancingReplacing existing debt with new debt, usually to change the rate, the term, the structure or the lender.Break costsWhat a lender charges to exit a fixed-rate facility early, calculated from the rate movement rather than set as a fee.Line feeAn annual percentage charged on a facility limit, whether or not the money is drawn.Establishment feeA one-off fee charged when a facility is set up, usually a percentage of the amount borrowed.Interest-only periodA window at the start of a facility where only interest is paid and the principal does not reduce.Balloon paymentA large lump sum owing at the end of a facility, because the repayments were never sized to clear the balance.AmortisationPaying a loan down to zero over its term, a bit of principal at a time, rather than paying interest and leaving the debt where it started.Principal and interest (P&I)Repayments that cover both the interest charged and a slice of the debt itself, so the balance actually falls.Fixed and variable ratesWhether your rate is locked for a period or moves with the market, and what each choice costs you when you want out.Basis pointsHundredths of a percentage point. A hundred basis points is one percent, and margins are quoted in them.Bank bill swap rate (BBSW)The wholesale benchmark larger commercial facilities are priced against, with the lender's margin added on top.Interest capitalisationInterest added to the loan balance instead of being paid in cash, so the debt grows while nothing is due.Lenders mortgage insurance (LMI)Insurance the borrower pays for that protects the lender, not the borrower, where the loan is a high proportion of the property value.
These terms are not academic here. They are the working language of our financial due diligence, the lender submission packs and the Debt Capacity Assessment.
For the terms applied to real numbers, the insights articles work through add-backs, serviceability and forecasts with the arithmetic shown.
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