Explaining red flags to a lender: ATO debt, losses and credit issues

Almost every small business file has something in it that needs explaining. An ATO balance that grew during a tough quarter. A loss year during a restructure. A late BAS when the bookkeeper left. A director’s old default from a previous business. None of these automatically rules out finance. What makes the difference is how — and when — they’re explained. As the adviser, you’re usually the best person to write that explanation.

Why advisers should write the explanation

Owners tend to either over-explain (long, emotional, defensive) or under-explain (hoping it won’t be noticed). You can do what lenders actually want: a short, factual account with evidence. You also have the documents to back it up.

Of course, the client must agree to what’s said. Draft it, review it with them, and send it with their authority.

The four-part structure

Every red-flag explanation should cover:

1. What happened — the fact itself, with a figure if relevant
2. When — the period or date
3. Why — the cause, in one sentence
4. What’s changed — the fix, with evidence attached

Two to four sentences is usually enough. Lenders read a lot of files; brevity is a courtesy.

Illustrative examples

ATO debt:

“The activity statement account has a balance of about $64,000 as at 30 September. It arose over the March and June quarters when a major client paid four months late during a large contract. The client has since paid in full, and a payment plan entered on 2 August is being met; the ATO statement attached shows instalments received.”

Loss year:

“The company recorded a net loss in FY25 due to one-off costs of relocating to new premises and a three-month overlap of two leases. Management accounts for the first quarter of FY26, attached, show a return to profit at a level consistent with FY24.”

Late lodgements:

“BAS for two quarters in 2025 were lodged late following a change of bookkeeper. All lodgements have been current since, as shown in the attached lodgement history.”

Director’s past default:

“A default of around $3,000 was listed in 2023 against a director, relating to a utility account from a closed previous business. It was paid in full in early 2024; confirmation is attached.”

All figures and details above are illustrative.

What to attach

Red flag	Evidence that helps
ATO debt	ATO account statement, payment plan confirmation, instalment history
Loss year	Current management accounts showing recovery, note of one-off costs
Late lodgements	ATO lodgement history showing current status
Past default	Payment confirmation, credit report extract if the client has it
Dishonours on bank statements	Note of the cause and a clean recent period
Single large customer	Contract, payment history, aged debtors

Timing: raise it at the start

The worst time for a lender to learn about a problem is after they’ve formed a positive view. Include explanations with the first documents, or have the client mention them on the first call. That’s especially important for ATO debt: once a six-figure tax balance has been overdue for three months and the business isn’t working with the ATO, it can be passed to the credit bureaus — meaning a lender may find it on a credit report regardless.

Tone: facts, not feelings

Avoid:

• Blame — “the bank pulled our overdraft unfairly”
• Adjectives — “a minor, insignificant default”
• Excuses — “everyone in our industry had a bad year”
• Promises — “this will never happen again”

Instead, state facts and show what’s changed. Lenders trust evidence more than assurances.

When there’s more than one issue

Some files carry two or three issues at once — say, an ATO balance, a late lodgement and a dishonour or two. Don’t send three separate notes. Write one short summary that connects them, because they often share a cause:

“The June quarter was difficult: a major customer paid late, which led to two dishonoured supplier payments in May, a late June BAS and an ATO balance. The customer has since paid, BAS is current, the ATO balance is on a plan being met, and bank statements since August show no dishonours.”

That paragraph, which is illustrative, tells a single coherent story — and a lender can check every part of it against the attached documents.

Which lenders are more flexible?

ATO debt and past credit issues are considered case by case. Lenders that take property as security often focus mainly on the security and the exit plan, so they can be more accommodating of a blemish. Secured limits run from $20k up to $5m; see property equity and secured loans. Unsecured cash flow lenders tend to weigh recent bank statement conduct heavily, so a clean last six months matters.

Matching the file to a lender whose policy suits it is often the biggest single factor. That’s the linking role we play.

One rule above all

Never alter or omit a document to hide a red flag. Lenders verify statements, run credit checks once a client proceeds, and compare figures across documents. A file that’s been edited to look better almost always does more harm than the issue it was meant to hide.

Turn the explanation into an enquiry

If your client has a red flag and a good explanation, they may have more options than they think. Start the enquiry with them, noting that you’re their adviser and that there’s context to share. No credit check is run at that point, their file is matched with one suitable lender instead of broadcast to many, and a real person calls the client to hear the full story. Encourage them to disclose the issue accurately on the form — it helps us choose the right lender from the start. Make the introduction.