1. Income assessment
The RAA evaluates the gross income from the applying entity, individuals and any related entities that the applying entity or individuals have a formal interest in, including items such as salary, rental income, and other sources of regular income.
2. Expense calculation
The RAA subtracts the business expenses as well as living expenses, utilities, debt commitments and other recurring payments, such as tax, rental expenses.
3. Debt commitments
Any existing debts for the applying entity, individuals and any related entities that the applying entity or individuals have a formal interest in, such as credit card limits, term loans, overdraft facilities, home loans, investment loans, equipment/asset finance, buy now pay later and livestock loans, are all factored in. The RAA will consider the limits and balance owing for all debt types, including undrawn limits.
4. Seviceability buffer
The RAA adds a buffer to the interest rates on existing loans to ensure you can still afford repayments if rates rise without placing financial strain on the business. The RAA applies a buffer based on recommendations from the Australia Prudential Regulation Authority (APRA).
5. Debt Service Ratio
Based on the above factors, the RAA calculates your Debt Service Ratio (DSR), which is the percentage of your income that goes towards debt repayments. This helps determine how much you can comfortably borrow.
This process ensures that the RAA lends responsibly and that borrowers can manage their loan repayments even if financial conditions change.
Demonstrating serviceability
As part of the application and assessment process, you are required to provide documentation that is used to ensure your application demonstrates the capacity to service the new loan. Some examples of documents required are:
- lodged tax returns and financial statements (if completed) for the past three financial years for the applying entity, individuals associated with the applying entity and any related entities that the applying entity or individuals have a formal interest in as a director, partner or trustee
- statement of financial position including all assets, income, expenses and liabilities (commitments) for all entities and individuals associated with the applying entity
- mortgagee consent form (if applicable) signed by any party (lender) that has a registered mortgage or caveat on the property offered as security, with information in relation to property offered and current debt
- commitment schedule including all commitments (debts) for all entities and individuals associated with the application, including term loans, overdrafts, credit cards, asset and equipment finance, buy now pay later and home loans.
Long-term viability
Long-term viability is the ability of a business to meet operational and debt repayments, deliver on commitments, adapt to industry-wide challenges and uncertainty, and remain financially sustainable.
You can demonstrate financial viability by presenting historical financial data, budgets and forecasts that showcase the ability to generate revenue, manage expenses and maintain profitability.
By adopting a proactive approach to financial management and regularly monitoring performance against established benchmarks, a business can enhance its credibility and demonstrate its ability to remain financially stable in the long term.
We see that a business is viable when it can:
- pay existing loan repayments, hire purchases, leases, credit cards and overdrafts at commercial rates
- ensure that there is a suitable standard of living for all members of the business
- invest in infrastructure, both fixed and non-fixed assets, to ensure that the business continues to be productive.
A commitment is a financial obligation to a regular and reoccurring expense. Other names for commitments are liabilities, debts, collections and responsibilities. Examples of commitments include loans, hire purchases, leases, credit cards and overdrafts. You are required to disclose all of the commitments of the business and the members of the business as well as all related entities you have a formal interest in.
Other factors that help us determine the long-term viability of the business include:
- number and value of assets and liabilities
- type of assets and whether they can be sold and turned into cash quickly
- age of the assets
- nature of the liabilities and whether they can be repaid with savings or the sale of an asset, if needed
- how long the liabilities have remaining
- amount of equity in the property being offered to secure the loan.
Loan security
Our preference is to use the property where the work is being carried out as security. We will consider alternate security on a case-by-case basis.
The RAA looks at the value of the property being offered as security and uses this as a marker to determine the gearing ratio on the loan. Gearing is also known as the loan to value ratio. For example, the loan application is $500,000 and the land value is $1,000,000, therefore the gearing ratio is 50%, meaning that 50% of the land value has a loan against it.
The mortgagee consent form is used to help the RAA understand any existing priority arrangements that existing mortgagees might have in place and allows negotiation with the existing mortgagees to allow for the proposed RAA loan. Formal consent and priority arrangements will be put in place once a loan is approved.
When offering a property as security that has an existing mortgage, the mortgagee (for example, the bank) will need to complete and sign a mortgagee consent form which is included in the list of what you will need to apply, as specified in the program guidelines.