How much more do you need to sell to cover a loan repayment?

A business loan changes one number more than any other: the level of sales you need just to stand still. The quick version is monthly repayment ÷ gross margin. If your gross margin is 40%, each $1,000 of monthly repayment needs about $2,500 of extra monthly sales before you’re back where you started. That’s the headline. The fuller answer — the one that tells you whether the bank account will hold up — needs a few more lines, and that’s what this guide works through.

With the pre-Christmas run starting and plenty of owners weighing up gear, stock or a fit-out before summer, it’s the calculation worth doing before you sign anything.

What is a break-even point, in plain terms?

Your break-even point is the level of sales where money in exactly covers money out. NZTE describes it as the minimum you’d need to sell “to make back your costs” (NZTE). Below it you lose money; above it every extra sale adds profit.

The standard formula uses two inputs:

Break-even sales = fixed costs ÷ gross margin (as a decimal)

• Fixed costs are what you pay whatever you sell: rent, salaried wages, insurance, software, vehicle leases, accounting fees.
• Gross margin is the share of each sales dollar left after the direct cost of making that sale — materials, stock, subcontractors, card fees, freight. If a $100 job costs $58 in direct costs, your gross margin is 42%.

If you’re GST-registered, keep every figure GST-exclusive. GST you collect isn’t yours, and including it overstates your margin.

Why does a loan repayment change the answer?

A repayment is a new fixed cost. It’s due whether it’s a record month or a dead one. So it adds to the top half of the formula, and the effect gets bigger the lower your margin is.

Here’s the rule of thumb for every $1,000 of monthly repayment:

That table explains a lot. A consultancy on a 70% margin barely notices a modest repayment. A wholesaler or builder on 20–25% needs four or five times the loan cost in new turnover to carry it. Same loan, very different burden.

Profit break-even vs cash break-even: which one matters?

This is where most back-of-the-envelope calculations go wrong. A repayment has two parts, and they’re treated differently.

• Interest is an expense. business.govt.nz lists “interest on borrowing money for the business” among the costs you can claim (business.govt.nz). It reduces profit and it reduces tax.
• Principal is you handing back the money you borrowed. It isn’t an expense, it doesn’t reduce taxable profit, and it isn’t in your profit and loss at all — but it still leaves your bank account every month.

So there are really two break-even numbers:

1. Profit (accounting) break-even — fixed costs + interest + depreciation, divided by gross margin. This is where your P&L shows zero.
2. Cash break-even — fixed cash costs + interest + principal + tax on any profit, divided by gross margin. Depreciation drops out because no cash moves. This is where your bank balance stops falling.

Lenders care about the second one. When they read your bank statements, they’re checking whether there’s enough surplus cash to carry the full repayment, not whether the accounts show a small profit.

The tax catch on principal

Because principal isn’t deductible, it has to be paid from after-tax profit. For most companies the rate is 28% (Inland Revenue), so roughly speaking a company needs about $1.39 of pre-tax profit to fund each $1 of principal (1 ÷ 0.72). Sole traders and partners use their own marginal rate instead.

There’s a helpful offset. If the loan buys an asset, the depreciation on that asset is deductible even though it costs no cash. So the profit that actually gets taxed is roughly principal minus depreciation. When the two are close, the tax effect is small; when you’re repaying fast on an asset that depreciates slowly, it’s bigger.

Our guide to depreciation and buying equipment before 31 March covers how the timing of that deduction works.

A worked example: a joinery workshop buying a CNC router

Illustrative figures only — not a real client. A Hamilton joinery business is looking at funding a CNC router. It currently outsources some panel cutting.

Before the loan (monthly, GST-exclusive):

Break-even = $38,000 ÷ 0.42 = about $90,480 a month. Normal sales sit around $21,500 above that.

After the loan. Say the repayment is $3,200 a month, of which $900 is interest and $2,300 is principal in the first year, and the router depreciates by about $1,500 a month.

Profit break-even: ($38,000 + $900 + $1,500) ÷ 0.42 = about $96,190.

Cash break-even:

• Cash fixed costs + full repayment: $38,000 + $3,200 = $41,200
• Taxable profit at that point: principal minus depreciation = $2,300 − $1,500 = $800
• Tax on that at 28%: about $224
• Total cash to cover: about $41,424
• Cash break-even = $41,424 ÷ 0.42 = about $98,630 a month

So the loan lifts the cash break-even by roughly $8,150 a month. On the current $112,000 of sales, the cushion (margin of safety) shrinks from about 19% to about 12%.

Now add what the machine does. Bringing panel cutting in-house cuts direct costs. If that lifts gross margin from 42% to 45%, the cash break-even becomes $41,424 ÷ 0.45 = about $92,050, and the cushion is back up to roughly 18% — before counting any extra jobs the router lets them take on.

That’s the real decision: not “can we afford $3,200 a month?” but “does this spend move the margin or the sales enough to pay for itself?”

Weighing up a purchase like this? See what you could qualify for — it takes about a minute and there’s no credit check at the enquiry stage.

How to run the numbers for your own business

1. Pull the last 12 months from your accounting software: sales, cost of sales, and overheads. Use a monthly average, then look again at your quietest three months.
2. Work out gross margin: (sales − cost of sales) ÷ sales.
3. List fixed cash costs, leaving out depreciation.
4. Get an indicative repayment and split it into interest and principal.
5. Estimate the tax on principal minus any new depreciation, at your rate.
6. Divide the total by your gross margin. That’s your cash break-even with the loan.
7. Model the upside honestly — a realistic margin or sales lift, not the best case.

If the quiet-month figure falls below your new break-even, that doesn’t automatically mean don’t borrow. It means you need a plan for those months: a buffer, a shorter or longer term, or a separate facility. Our cash-flow gap calculator shows whether a shortfall is a timing issue or a trading issue, and the cash conversion cycle guide shows how slow-paying customers quietly raise the cash you need.

Ways to bring your break-even back down

• Match the term to the asset. A longer term cuts the monthly principal, which lowers cash break-even (at the cost of paying interest for longer). For equipment, a term close to the asset’s useful life is a sensible starting point — see lease vs buy vs borrow.
• Lift the margin, not just the sales. In the example above, a 3-point margin gain on $112,000 of sales is worth the same as about $8,000 of extra monthly sales — without finding a single new customer.
• Trim a fixed cost at the same time. Ending an outsourcing contract or a vehicle lease when the new asset arrives offsets part of the repayment.
• Use the right product for the job. Long-lived assets suit equipment funding or a term loan; recurring timing gaps usually suit a business line of credit, where you pay for what you draw rather than a fixed lump sum.

Common mistakes in break-even maths

• Using GST-inclusive sales. It inflates the margin and makes the loan look cheaper than it is.
• Counting the whole repayment as an expense. It overstates tax savings. Only interest is deductible.
• Forgetting the owner’s drawings. If you pay yourself through drawings rather than wages, that cash has to come from somewhere — add it to fixed costs for a true cash picture.
• Using the average month only. Break-even is a monthly test. A seasonal business can be comfortably above it for the year and still short in June.

Turning the maths into a funding decision

Working out your cash break-even is exactly what a good lender does when they look at your application — so if you’ve done it yourself, you’re already ahead. You know what the repayment really costs in sales, what the purchase should earn back, and how much room you’ve got in a slow month. The next step is finding the loan structure that fits those numbers, whether that’s working capital, equipment funding or a property-secured loan from $20,000 to $1m.

That’s where we come in. Enquiring takes about 60 seconds and there’s no credit check when you first enquire. We don’t send your details to a pile of lenders, so your phone won’t light up with calls from people you’ve never heard of. A real person looks at your situation — your margin, your season, what you’re buying — and calls you to talk it through.

One favour: fill the form in accurately. Real turnover, real amounts owing, and what the money’s for. It means we can match the right option first time rather than going back and forth.

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