Commercial loans

What is a commercial loan?

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.

How do commercial loans work?

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.

What are the differences in purchasing commercial and residential properties?

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:

• Higher interest rates. Compare commercial property loan interest rates with current home loan rates to get an idea of how rates can differ.
• Lower maximum LVRs. While it's possible to borrow 90% or even 95% LVR on a residential property loan, on commercial property loans many lenders offer a maximum LVR of 70%. This means you will need to have a larger deposit saved in order to qualify for a loan.
• Higher fees. Make sure you're aware of all upfront and ongoing fees that apply to a loan before deciding whether it's right for you.

How much deposit do you need for a commercial property loan?

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.

How should you compare commercial property loans?

There are several factors you should consider when choosing a commercial property loan, including:

• The interest rate. The rate you receive can make a huge difference to the total cost of a loan, and rates vary greatly depending on what represents an acceptable level of risk to each lender. Compare rates between lenders to look for the best available deal.
• Fees. It's also essential to be aware of all fees that apply to a loan. In addition to upfront application fees and ongoing monthly or annual fees, other fees may apply in specific circumstances, such as if you make an additional repayment or access the loan's redraw facility.
• Maximum LVR. Find out how much each lender is willing to let you borrow to purchase a particular commercial property. For example, let's say you want to buy a commercial property valued at $750,000. Lender A will offer a maximum LVR of 70% while Lender B will only let you borrow 60% of the purchase price. You'll only need a deposit of $225,000 (30% of the purchase price) if you use lender A, but that figure rises to $300,000 if you use Lender B.
• Loan limits. How much is the lender willing to let you borrow to buy a commercial property? Minimum and maximum limits apply, with many lenders offering loans of between $200,000 and $5 million. Loans of $5 million and above are also offered but may have specialist assessment criteria, with lenders weighing up the merits of each application on a case-by-case basis.
• Repayment schedule. Calculate your ongoing repayment amount on any proposed loan agreement – will you realistically be able to afford your repayments? Are you required to make principal and interest repayments from day one, or can you choose interest-only repayments for an initial period?
• Other features. Finally, check the full list of loan features to determine whether it has the flexibility to be tailored to your needs. For example, can you make additional repayments without incurring any penalties? Can those additional repayments be accessed through a redraw facility if you have a cash flow shortage?

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.

What loan can help you purchase a commercial property?

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:

Commercial loans for purchasing or refinancing commercial property

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.

Property development and construction loans

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-division finance

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.

Mezzanine debt finance

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.

Commercial loans for buying or refinancing a business

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.

Factory finance

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.

Land bank finance

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.

Rural property loans

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.

Commercial loan comparison

• Bigstone Small Business Loan: Borrow up to $5,000,000 for 12 months to 5 years. A peer-to-peer commercial loan that allows businesses to access the funds they need.
• GetCapital Business Loans: Borrow up to $750,000 for 12 months to 3 years. A flexible business loan product suitable for a range of purposes.
• Max Funding Unsecured Business Loan: Borrow up to $30,000 for 1 month to 1 year. Use the funds for a range of different purposes.
• Business Fuel Loans: Borrow up to $200,000 for 3 months to 1.5 years. Allows small- to medium-sized businesses to expand their operations, renovate offices, invest in advertising and marketing or assist with cash flow.
• NAB QuickBiz Loan: Borrow up to $250,000 for 1 to 3 years. A commercial loan with no security required and if you link 12 months of your business's finance data you can get a response in 60 seconds.

One alternative to commercial loans is business credit cards. Check out our comparison to find the right one for you.

What other types of commercial loans are available?

• Line of credit
  A line of credit works as a standby loan for the business, whereby the business can access up to a pre-set limit with the lender. You won't pay interest on this account until you use the available credit, but you may be charged fees for the account.
• Overdraft facility
  An overdraft facility is something that is linked to your business's current bank account and allows you to withdraw over the available balance. This financing option is usually used to assist with cash flow problems in businesses and you often won't be charged until you use the facility.
• Chattel mortgage
  This is a type of commercial finance which is used to purchase a vehicle. You will be lent the money to purchase a vehicle for business purposes and the lender will take out a mortgage on the vehicle for added security. You will have ownership of the vehicle and once the loan is repaid, the mortgage will be removed.
• Leasing finance
  This type of loan can help you lease out commercial equipment for your business operations. Whether it be equipment for the long term or short term, you can look at loan options to help you finance a lease for small and large business equipment of all types.
• Business term loans
  These are standard loans where you can borrow an amount for a set period of time. Repayments usually comprise of a portion of your principal plus the accrued interest and fees. They can be fixed or variable. These loans are designed to help boost capital for business investments.

Benefits and drawbacks of commercial loans

Why is the interest rate on a commercial property loan higher?

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:

• The location of the commercial property
• The performance of the local property market
• The location of the property offered as security for the loan
• Your financial situation and ability to repay the money you borrow
• The LVR (in other words, the size of the deposit you have saved)
• The length of time remaining on the lease and the quality of the tenants in place
• Your assets and liabilities
• Your experience as a commercial property owner

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.

Security for a commercial property loan

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:

• Offices
• Retail spaces
• Factories
• Warehouses
• Residential properties (such as a block of units)

However, depending on your circumstances you may have to offer a specialised commercial property as security. These include:

• Restaurants and pubs
• Hotels, motels, caravan parks and other accommodation properties
• Childcare centres
• Private schools
• Aged care facilities
• Farms
• Shopping centres

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.

Getting your commercial property valued

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.

When and why should you use a mortgage broker?

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.

What information and documents should you supply?

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:

• Personal and company information. You'll need to provide your name, contact details and proof of ID. Other information may be required for different applications – for example, companies will need to provide their ABN and full contact information.
• Financial details. You'll need to provide details of your assets and liabilities, including the size of the deposit you have saved. You'll also need to provide cash flow projections so the lender can calculate your ability to meet repayments.
• Property details. Next, the lender will need to know details of the property you want to purchase, such as its location and features. A professional valuation will determine how much the property is worth, while if you're buying the property as an investment, you'll also need to supply details of the current lease agreement and the quality of the existing tenants.
• Other information. The lender may request a wide range of other details depending on the size of the loan you want and the property you are purchasing. For example, the lender may want to see evidence of your track record running a similar business before providing the finance you need to purchase a commercial property.

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

Is there anything else to consider before applying?

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.

Commercial loans comparison

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Name	Product	Min. Loan Amount	Max. Loan Amount	Loan Term	Upfront Fee	Filter Values
ebroker Business Loan		$5,000	$5,000,000	1 month to 30 years	$0 application fee		Small business loans available between $5,000 and $5,000,000. Get access to 70+ non-bank lenders on this independent platform.	Enquire now	Compare	loading Fetching your data...
Valiant Finance Business Loan Broker		$5,000	$1,000,000	3 months to 5 years	$0 application fee		A Business Lending Specialist from Valiant Finance can give you access to competitive business loans from over 70 lenders. Loans between $5,000 and $1 million are available. Request a call – your loan can be funded in 1 business day.	Enquire now	Compare	loading Fetching your data...
OnDeck Business Loans		$10,000	$250,000	6 months to 2 years	3% of loan amount		Apply for up to $250,000 and receive your approved funds in one business day. Minimum annual turnover of $100,000 and 1 year of trading history required.	Go to site More Info	Compare	loading Fetching your data...
Prospa Business Loan		$5,000	$300,000	3 months to 3 years	3% origination fee		Small business loans are available from $5,000 - $300,000 on terms of up to 3 years. At least six months trading history and a monthly turnover from $6,000 is necessary.	Go to site More Info	Compare	loading Fetching your data...

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FAQS about commercial property loans

• Will the lender conduct an annual review of my loan?

  This depends on the size of your commercial property loan. While a loan for a small commercial property investment will most likely not receive an annual review, your lender may wish to regularly re-assess the situation in regards to any loan where the level of risk is highly variable. For example, if you borrowed a large amount, such as $2 million or more, or if you are struggling to make loan repayments.

• What does an annual review involve?

  The process varies between lenders but you will typically need to provide financial details such as a profit and loss statement, balance sheet and cash flow projections. Your security property may also be re-valued as part of the review.

• Who is eligible for a commercial property loan?

  Commercial property loans can be provided to a wide range of borrowers, including:

  • Individuals
  • Public companies
  • Private companies
  • Trusts
  • Partnerships
  • Self-managed super funds (SMSFs)

• What are the pros and cons of investing in commercial property versus investing in residential property?

  You can find out more about the benefits and drawbacks of both residential and commercial property investing in our comprehensive guide.

• Is it possible to refinance a commercial property loan?

  Yes, you are allowed to refinance a commercial property loan to get a better interest rate or more favourable loan terms, or even to release equity.

• Will I need to switch all my business banking products to the same lender that offers my commercial property loan?

  In many cases, you will be required to switch all of your business banking products over to your new lender. However, some lenders will not require you to take this step in specific circumstances, such as if you have a loan of less than $1 million that does not require an annual review.

• Are there any tax implications when buying commercial property?

  Yes, you'll need to pay goods and services tax (GST) when buying a commercial property, while capital gains tax (CGT) is payable when you sell a property used for running a business. Contact your accountant for expert tax advice tailored to your financial situation.