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If you're looking to expand your business but lack the funds to do so, a commercial loan can help. Whether you need to purchase equipment or commercial property, hire staff or otherwise improve your business activities, find out how commercial loans work and if one is right for your business.
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A commercial loan is a type of finance that can be taken out by individuals, partnerships, discretionary trusts and other groups, on behalf of a business or company. These loans are used to fund commercial operations that can help grow and develop a business, whereas a commercial property loan is a specific type of business loan that is used to fund the purchase of a property to be used for commercial purposes.
Commercial loans work much the same as other loan types but are specifically used for business purposes. They can be taken out by individuals or partnerships on behalf of businesses to fund operations, equipment and commercial property. As the loan amount will be used to invest in the business, the financials of that business will be taken into account when the lender is deciding whether to approve the loan.
There are also various benefits to commercial loans, as they are tailored for use by businesses. They offer flexible repayment options to support fluctuations in cash flow and the loan amounts on offer are usually much higher than with other loans. There are also related products specifically designed for commercial purposes, such as leasing finance.
If you're looking to invest in commercial property, you're generally looking at properties designed for use as an office, retail or industrial space. Unlike residential property that has relatively low risks and offers lower returns, commercial property has the chance of a bigger return on investment, but at a higher risk.
Buying commercial property is also more expensive and maintaining or upgrading it can potentially cost you thousands of dollars. In addition, commercial properties typically experience higher vacancy rates and this is why they have a higher risk quotient than residential properties. Commercial property loans are specifically designed for buying business property and may offer better commercial interest rates, but you can also use a normal commercial loan for this purpose.
Australian lenders view commercial property loans as a riskier investment than residential property, largely due to the fact that vacancy periods can be extensive. As a result, commercial property loans tend to have a few key differences when compared to their residential counterparts. Those differences include:
Commercial property loan expert Scott O'Neill from Rethink Investing confirms that you generally need a higher deposit to buy a commercial property, compared to buying a residential property.
"The maximum loan LVR you would usually receive when buying commercial property would be 60-70%, with some banks offering up to 80% loans, unlike the 90-95% now available for residential property," he explains.
"This is because commercial property is deemed more risky in the lender's eyes, and their loan value ratio is lower). Where residential property can be purchased with as little as $50,000 as a deposit to cover all necessary costs, commercial on the other hand is $75,000-$100,000 as a minimum."
That said, O'Neill believes that despite the slightly higher upfront cost, a commercial property can be a good investment due to the higher rental returns.
"High-quality commercial property has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take. That means all of that money usually going to the bank, after the debt is paid, then goes straight into your pocket, not to mention the fact that it opens up the possibility to leverage equity and purchase a second, third and fourth property. So the decision to pay a higher deposit in the beginning, starts paying dividends afterwards," he says.
There are several factors you should consider when choosing a commercial property loan, including:
By carefully considering the features and conditions of a range of commercial property loans, you'll be able to find the best finance solution for your needs.
While every commercial property is different, there are some general tips that can help smooth out the process of making your purchase:
Investing in commercial real estate has several benefits, but it involves a significant investment on your part. Here are the types of loans available to you if you're looking for finance:
These loans are an option if you're buying your first commercial property or refinancing an existing loan. They're ideal for purchasing an investment or occupied commercial property.
These loans are useful for constructing commercial properties, residences and sub-divisions. You could use one for completing a development project and selling the assets to repay your loan.
Sub-dividing land lets you increase the value of your property without constructing anything on it, but these loans can be used for construction purposes too.
You can use mezzanine financing to complete a project, complete an expansion or to borrow additional capital. This type of loan is normally taken out when a bank loan falls short of providing the full financing you need. Typically, lenders provide the funding based on the property's assets and the projected equity.
If you want to purchase an existing business or a successful franchise, you'll need to consider the business history, the value of the tangible assets, the estimated value of the intangible assets and the ability to yield good returns on investment. People generally use these business loans or term loans to invest in an existing business.
These loans are useful for keeping organisations in business by helping them purchase equipment and technology. From production equipment to packaging materials, this loan can help you utilise your capital to meet other expenses while funding your working capital requirements.
If you view abandoned properties and vacant lots as assets, these loans are ideal. They let you create, hold and develop vacant properties, then convert them into marketable assets that can double or triple your investment.
If you want to purchase property in a rural region, these loans are designed for that purpose. You could use them to purchase a property or to consolidate your debts.
One alternative to commercial loans is business credit cards. Check out our comparison to find the right one for you.
Each lender has its own tolerance for risk and its own lending policies. Combined with the fact that the type of commercial property finance needed can vary substantially from one borrower to the next, this means that many of the features of a commercial property loan can be up for negotiation.
This is clearly demonstrated by commercial property loan interest rates. Unlike residential home loan interest rates, which are widely publicised on lenders' websites and in marketing material, commercial property loan rates are rarely published anywhere.
Why? Because there are several factors that influence the rate which will apply to your loan, including:
When you apply for a commercial property loan, the lender will consider all of the above factors when determining whether to approve you for a loan, and when calculating the interest rate that will apply.
The next factor to consider is the property you will offer as security for your loan. This can have a big impact on the amount a lender will allow you to borrow as different security properties come with different risks attached.
Standard commercial properties are usually an ideal type of security for your loan. These are properties that have a broad appeal to buyers, are in a good location and are zoned appropriately for their desired use. Standard properties include:
However, depending on your circumstances you may have to offer a specialised commercial property as security. These include:
If you list a specialised property as security for your loan, your lender will need to perform a detailed valuation of the property and also assess the risks associated with that property. As a result, you'll typically only be able to qualify for a much lower LVR.
Offering your own home as collateral may be an option to help you access a higher LVR and a better interest rate. However, this approach does increase your exposure to risk, so seek expert advice before determining whether it's the right option for you.
When you apply for a commercial property loan, the property you want to purchase will need to be professionally valued. A professional valuation is carried out by a qualified valuer and is an essential step to allow you to obtain the finance you need. Not only does it help you calculate whether the price you are paying is fair, but it also allows the lender to work out whether you can be expected to afford your loan repayments.
However, because a commercial property valuation is much more involved than the valuation of a residential property, the process costs more. You'll need to factor this additional cost into your calculations when working out the total cost of a loan.
Commercial property lending is far more complex than residential home loan lending, and making sense of the loan options and features available can be a confusing task. Different lenders also specialise in offering loans to suit different types of commercial property buyers – for example, while one lender might specialise in offering finance for start-up businesses, another may be able to offer better deals to a commercial property investor or a developer.
This is when a mortgage broker is your best friend. An experienced broker can use their knowledge of commercial property lending to help you decide which lender is most likely to offer a suitable finance solution. He or she can then assess your current financial situation and your borrowing requirements before helping you compare a wide variety of loans to find one that matches your unique needs.
Commercial property lending is a complex area, and the information and documentation you'll need to supply when applying for a loan vary depending on the lender you select, the type of property you want to buy and the amount you need to borrow.
However, as a general guide you will need to supply:
Your mortgage broker can help you prepare an application that addresses all the necessary criteria and gives you the best chance of approval. If your application is refused or approval is delayed, a broker can also help you work out what you can do to improve your chances of accessing the finance you need.
Finance sorted? Learn about commercial property insurance
As this is a commercial loan, any defaults will be listed on your business's credit file and could seriously impact the future profitability of your business. Ensure that you don't apply for a loan that your business won't be able to pay back and that you have a solid financial plan of how you'll incorporate the added expense of the loan repayments into your business budget.
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hello,
me and 2 other partners are thinking to start a new business, we found a site and we intend to build 5 town houses, with the view of selling some and keeping some.
would you be able to advise on what would be the best financing and exit strategy?
Hi Franco,
Thanks for your question.
If you are building townhouses, you may consider getting a subdivision loan to finance your project.
Additionally, for expert advice on the most suitable home financing and exit strategy, you may want to consider getting in touch with a mortgage broker.
Cheers,
Anndy