How do add backs increase a self employed borrower capacity?

A common frustration for business owners is being assessed on a net profit figure that looks lower than the money actually available to them, because that figure includes deductions that are not ongoing cash costs. This is where add backs come in. Here is how they work.

What an add back is

When a lender assesses self employed income, it often starts from your business net profit and then adds back certain expenses that reduced that profit on paper but are not ongoing cash outflows. Adding them back gives a figure closer to your real serviceable income, which can lift your borrowing capacity.

Common items lenders may add back

The items lenders may consider adding back commonly include depreciation, which is a non cash accounting expense, the interest on any debts you are consolidating or refinancing, and genuine one off costs such as a major equipment purchase or business setup expense that will not recur. Superannuation contributions above the compulsory amount are sometimes considered too.

Why it matters

Add backs matter because they can be the difference between a net profit that looks too low to borrow what you need and a realistic income figure that supports it. For asset heavy businesses with large depreciation, or borrowers consolidating existing debt, the effect can be meaningful.

What can be added back varies by lender

This is important: lenders differ in what they will add back and how. One lender may add back a particular expense that another will not, so the same financials can produce different income figures at different lenders. There is no single universal rule, which is why the choice of lender matters here.

It has to be genuine

Add backs are not a way to inflate income artificially. Lenders add back items that genuinely are non cash or non recurring, and they will want the financials to support it. An add back that is really an ongoing cost would not be accepted, and trying to treat it that way would undermine the application.

Your accountant is central

Because add backs come straight from how your financials are prepared and presented, your accountant is central to getting them right. Well prepared financials that clearly identify depreciation, one off costs and the like make it far easier for a lender to apply the add backs you are entitled to.

Present your income properly

The practical lesson is that how your income is presented can change what you can borrow, within the bounds of what is genuine. A broker who works with self employed borrowers can identify lenders with favourable add back policies for your situation, usually at no cost to you, while your accountant ensures the financials support it. This is general information, not advice.