Writing a letter of explanation a lender will actually read

What a letter of explanation is for

When a lender assesses your file, it sees facts: a default from 2023, an ATO balance, a run of overdrawn days, a bankruptcy on the public register. What it doesn’t see is the story. Without the story, the safest assumption is the worst one.

A letter of explanation fills that gap. It’s not a plea or a sales pitch. It’s a short, factual account that helps a credit assessor understand what happened and decide whether it’s likely to happen again.

It matters most with specialist and private lenders, where a person reads the whole file. If you’ve been declined because of defaults or judgments, tax debt or past insolvency, a good explanation is one of the most useful documents you can prepare.

The four-part structure

Every explanation, whatever the issue, can follow the same four steps.

1. What happened. The facts, with dates and amounts.
2. What you did about it. Payment, settlement, payment plan, dispute.
3. Where it stands now. Paid, current, completed, resolved.
4. What’s changed. Why it’s unlikely to happen again.

Keep each explanation to one paragraph. If you have several issues, give each its own short heading.

Examples you can adapt

These examples are illustrative. Use your own facts and words.

A paid default

“In August 2023 a $740 default was listed by a telecommunications provider after a billing dispute when we moved premises. The dispute was resolved and the amount paid in full in February 2024, and the listing now shows as paid. All other accounts have been paid on time since, as shown on the attached credit report.”

A court judgment from a supplier dispute

“In 2024 a former supplier obtained a default judgment of $6,200 over goods we had returned as faulty. We weren’t aware of the court date because the claim went to an old address. Once we learned of it we negotiated a settlement and paid it in full in May 2025. A copy of the settlement and payment confirmation is attached.”

An ATO debt on a payment plan

“Our company owes the ATO $38,000, mainly GST, after a major customer paid six months late in 2025. All BAS are now lodged. We set up a payment plan in July 2026 for $3,200 a month and have paid every instalment on time. The late-paying customer is now on 14-day terms. The current ATO statement and plan confirmation are attached.”

A past bankruptcy

“I was declared bankrupt in 2019 after a building company I worked for collapsed owing me and other subcontractors substantial amounts. I was discharged in 2022. Since 2023 I’ve run a smaller renovation business with a separate business account, lodged all BAS on time and used a bookkeeper. Recent statements and BAS are attached.”

Overdrawn days in bank statements

“The overdrawn days in March and April 2026 occurred because we paid a supplier deposit for a large order before the customer’s progress payment arrived. The customer paid in May, as shown on the statement. We have since arranged supplier terms so deposits align with customer payments.”

What to include

• Dates and amounts. Specific facts read as honest.
• Evidence. Payment confirmations, settlement letters, ATO statements, completion certificates.
• The current status. Paid, settled, current, completed.
• A forward-looking sentence. What you’ve changed.
• Your name, signature and date.

What to leave out

Avoid	Why
Long backstories	Assessors are busy; detail beyond the essentials dilutes the message
Blaming others at length	One clause of context is enough
Emotional language	Calm facts build more trust
Guesses or “roughly”	Use the figure from your documents
Promises you can’t evidence	Stick to what you can show
Leaving issues out	Undisclosed issues found later undermine everything else

Explaining things that aren’t on a credit file

Explanations aren’t only for credit listings. They’re just as useful for:

• Overdue tax returns: why they’re behind and when they’ll be lodged.
• A drop in turnover: what caused it and what’s happened since.
• Large one-off transactions: what they were for.
• A change in structure or directors: why it happened.
• A loan purpose: if the purpose is unusual, a short explanation helps.

Our page on bank statement red flags lists the patterns most worth explaining.

Putting it together

Combine your explanations into a single document, with a heading for each issue and the evidence attached in the same order. Add a short opening line, such as: “This letter explains the items a lender may notice on our credit reports and bank statements.” Finish with your contact details.

If there are several directors, have each sign the explanations that relate to them.

Not sure which issues need explaining? Send us a short enquiry and we’ll tell you what lenders are likely to ask about.

When an explanation isn’t enough

Some situations need more than words. A recent run of defaults, an active bankruptcy or an ATO debt with no plan usually needs action before an explanation will carry weight. In those cases, use the explanation to show the action you’ve taken, and choose lenders whose policies can accommodate your situation, such as bad credit business lenders or property-secured private lenders.

If you’re rebuilding after insolvency, our page on business finance after bankruptcy covers what lenders look for at each stage.

Illustrative example: A director’s application for a second mortgage stalled because the lender found two defaults and a judgment. The director provided a one-page letter with three short paragraphs, each with evidence attached, showing all three items were paid and related to a business partnership that had ended. The lender’s assessor approved the loan the following week.

A template you can follow

Here’s a simple layout for the whole letter. Replace the bracketed text with your own details.

Letter of explanation — [Business name], [ABN]

This letter explains items a lender may notice in our credit reports and bank statements.

1. [Issue, e.g. Default — telecommunications provider] [What happened, with date and amount.] [What we did.] [Where it stands now.] [What’s changed.]

2. [Issue] [Same four parts.]

Supporting documents are attached in the order above.

[Name], [Role], [Date], [Signature]

Keep the language plain. If a sentence doesn’t help the lender understand the issue, cut it.

Checking your letter before you send it

Read your letter as if you were a credit assessor seeing your file for the first time. Ask:

• Does each explanation say what happened, what was done, where it stands and what’s changed?
• Are the dates and amounts consistent with my credit reports and documents?
• Is the evidence attached, labelled and in the same order?
• Have I avoided blaming others at length or using emotional language?
• Is every issue a lender might notice covered?
• Is it signed and dated by the right person?

If you can, ask your accountant or adviser to read it too. A second reader often spots a missing date or an issue you’ve skipped over. A careful letter takes an hour or two to write, and it can save weeks of back and forth with a lender.

Where the letter goes in your application

Include the letter at the front of your supporting documents, after your ID and before your financial evidence. That way the assessor reads the context before they see the listings or transactions, rather than forming a view first and reading your explanation later.

Bring your explanation to us

A well-written explanation can open doors a scoring system closed. When you enquire, there’s no credit check at that stage, and your details aren’t distributed to multiple lenders. A real person reads your situation, including any explanations you have ready, and calls you. Please mention every issue you know about on the form; full disclosure is what lets us match you well. Start here.