Showroom commercial loan
Give your customers the chance to feel and experience your products by opening a showroom. Here's how to apply for a showroom commercial loan.
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Showrooms can come in all shapes and sizes, but are typically large warehouse style properties under 5000m² that showcase products, allowing consumers and wholesale buyers alike to test and experience products before deciding whether to purchase them. Common showrooms include those showcasing carpets and rugs, cars and other vehicles, furniture, white goods and other large appliances.
The idea of a showroom is to allow customers to touch, feel and experience large or bulky items. It also lets customers see how items work together and lets them witness product demonstrations.
Showrooms can be particularly attractive for investors because they tend to invite longer lease terms than other types of commercial real estate. For business owners currently leasing a showroom, the opportunity to purchase a showroom outright can have considerable financial benefits.
Showroom commercial loans you can apply for
Why are you considering purchasing a showroom?
Buying a showroom as an investment
If you are purchasing a showroom as an investment, the viability of the property itself will largely come down to the quality of the current tenant. A showroom with a reliable, long-term tenant running a successful business will ultimately provide a better investment than an untenanted showroom or a showroom with a struggling or haphazard tenant.
Conduct a thorough investigation into the showroom's tenancy arrangements before making an offer to purchase. Consider how long the tenant has occupied the showroom, the profitability of the business and their plans to stay in the showroom in the medium term. Also investigate occupancy rates in the area to get an idea of how long it may take to find a new tenant should the current tenant move out.
Tenants and lease agreements
Before purchasing a showroom as an investment, consider the terms of the current lease agreement itself and ensure that you have a full understanding of the rights and responsibilities of all parties.
Consider the following:
- What is the current lease term? Commercial showrooms tend to attract longer lease terms, so look for terms of at least five years to indicate stable rental income.
- How does the size of the showroom compare to other showrooms in the area? Larger showrooms can be more difficult to find tenants for and may bring in a relatively lower square meterage rate than smaller showrooms.
- Who is responsible for paying outgoings such as electricity, water and council rates? Look for a lease agreement where the tenant pays all outgoings.
It is always a good idea to seek independent legal advice on a tenancy arrangement before purchasing the property.
Running your own business from the showroom
If you are a business owner and are currently renting a showroom, it may be worth considering purchasing your own showroom outright rather than continuing to rent.
The choice whether to continue to rent or purchase your own showroom will come down to a thorough consideration of your financial circumstances and the cost implications of leasing versus buying.
Consider seeking independent financial advice when making this decision. An accountant or qualified financial planner can help you consider every variable including comparing mortgage repayments with rental payments, taking into account rental increases in line with inflation.
Also consider other factors, including the stability of your current lease agreement and whether you may need to leave the premises in the short term as well as any improvements or customisations you could make to a new showroom to better suit your needs. If you are going to be customising a showroom, you may be better off renovating and increasing the value of an asset you own rather than a rental property owned by someone else.
Factors to consider when comparing showrooms
Location and zoning
Consider the location of the showroom and how convenient it is for your target market to access. Wholesale buyers and, to a lesser extent, retail customers may be somewhat willing to go out of their way to visit a showroom to experience a big-ticket item like a car, caravan or expensive furniture. However, the closer the showroom is to major roads and metro areas, the better.
Lenders will also be more willing to approve finance application for a showroom in an established commercial district or close to a major shopping precinct than one much harder to access.
Additionally, consider the zoning of the area. Zoning varies between Australian states and territories and can change significantly from one council to another. To further complicate matters, zoning can change over time and can put onerous restrictions on the type of businesses that can legally operate in a showroom.
Speak directly with the council to find out any zoning restrictions in the local area, and make specific enquiries if you intend to use or store potentially dangerous or environmentally unfriendly items such as fertilisers or chemicals. It is much better to find out any zoning restrictions in advance than to go ahead with the showroom commercial loan application without being fully informed.
Finding finance for a commercial showroom
Standard loan terms
The following loan terms could apply to a showroom commercial loan:
- Loan amount. You may be able to get a loan of up to 70% of the value of the showroom itself or potentially up to 100% if the loan is also secured by residential property or a business loan guarantor.
- Loan term. You may be able to get a loan term of up to 15 years if secured solely by the showroom or up to 30 years if secured by a residential property. In some circumstances, the loan term could be linked to the time remaining in the current lease term.
- Interest rates. These will vary from lender to lender and will depend on the strength of your application, your financial circumstances and the security offered for the loan.
Some lenders will extend finance to purchase a showroom with the showroom itself as the only security for the loan. However, since lenders will typically only lend up to 70% of the value of the showroom, you will need a significant cash deposit. Alternatively, you could secure the loan with a residential property, such as your home or an investment property. Doing so could give you access to up to 100% of the value of the property as well as a better interest rate and a longer loan term.
What do lenders consider when evaluating a showroom?
When lenders consider a showroom commercial loan application, they will typically start by having a professional valuation taken of the showroom itself. They will take into account the location and zoning of the showroom, along with whether it has been purpose-built or could be converted to another use for a quick sale.
Presenting a solid loan application
When applying for finance, your chances of having your business loan approved will largely come down to your ability to convince the lender that you are a strong applicant with plenty of experience and the ability to run a profitable business.
If the showroom is currently tenanted, provide comprehensive information about the current lease agreement and the tenant's business.
If you are running your own business from the showroom, be prepared to provide the following during the application process:
- A business plan including cash-flow forecasting
- Evidence of significant managerial or similar experience running a showroom
- Financial statements for your business for the past three years, including full audited tax returns and profit and loss statements
- Evidence of a strong cash flow and easy ability to cover the ongoing loan repayments
- Ideally evidence of a secondary source of income to make the loan repayments during slow business periods.
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