Finding finance to purchase a supermarket
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Owning a supermarket may seem like an unachievable goal, but with a supermarket loan, anything is possible. Find out how to apply and increase your chances of a successful application.
With industry heavyweights Coles, Woolworths and Aldi dominating the supermarket industry, it could seem like there is no place for independent supermarkets in Australia. However, independent supermarkets are uniquely placed to offer locally-sourced and speciality products and can connect with the local community in a way that supermarket giants simply can't.
With many Australians looking for an alternative to Coles, Woolworths and Aldi, an independent supermarket can be a profitable business venture for the right investor. Find out how supermarket loans work and how to increase your chances of having your application approved.
Business loans you can apply for
Choosing a supermarket
Location and zoning
Location is key when it comes to choosing a supermarket. Consumers tend to gravitate towards supermarkets that are convenient and fit in with their lifestyle, whether it's one close to home, close to work, or en route between the two.
Supermarkets need to find the perfect mix of foot traffic access and an abundance of parking. Shopping centres are obvious choices for supermarkets, providing foot traffic from within the supermarket complex and ample parking – usually combined with easy access to public transport.
If choosing a supermarket location outside of a shopping centre, zoning will become an important consideration. Most supermarkets will fall under commercial zoning; however, some supermarket locations will attract a zoning that allows a mix of industrial and commercial businesses. Lenders may be wary of supermarkets located in a mixed industrial area, as many industrial businesses are closed on weekends and outside the normal 9-to-5 business hours, significantly reducing the area's foot traffic and the overall appeal during those times.
If considering locations outside shopping centres, make inquiries with the local council about the zoning in the area, including whether a zoning change is likely in the near future.
When it comes to commercial lending, much rides on whether the real estate itself is considered standard or specialised. Standard commercial real estate like commercial offices tends to be greatly preferred by lenders, as it can easily be converted to other uses for a quick sale. Specialised commercial properties like aged care facilities cannot readily be converted to suit a different type of business and can be much harder to sell.
The good news for borrowers comparing supermarket loans is that the majority of supermarkets are considered standard commercial real estate, and can attract more favourable loan terms as a result. Some supermarkets may have purpose-built elements to them, such as a dedicated butchery area, which the lender may take into consideration.
What are your plans for the supermarket?
Running the business yourself
Many lenders prefer supermarket loan applications for investment purposes only, where the supermarket is leased to a strong tenant. However, there are lenders who will consider extending finance to applicants who seek to purchase the supermarket freehold and run the business themselves.
Your task will be to convince the lender that you have the skills and experience necessary to run a successful, profitable supermarket. Think of the loan application process similar to a job interview, and update your CV to show all relevant experience (ideally five years or more) in a managerial or similar position in a supermarket or large convenience store.
Unlike other major retail businesses like car yards, supermarkets notoriously run on tiny profit margins. Lenders will need to be convinced that you have ample experience in a similar business, along with the skills necessary to successfully manage the key aspects of a supermarket including financial management, marketing and inventory management.
Dealing with tenants and lease agreements
If you're purchasing the supermarket as an investment, your business loan application power will largely come down to the tenant. Lenders want to see a stable tenant in a strong financial position – one who has reliably met their obligations under the rental agreement in the past and who has committed to a long-term lease.
Ideally, you will present to the lender a current lease agreement with at least five years remaining and an option to renew, along with tenant confirmation that they intend to stay in the premises for at least the medium term.
Finding finance to buy a supermarket
Standard loan terms
With the commercial finance industry largely unregulated, there is really no such thing as standard loan terms for supermarket loans. Lenders can impose loan terms as they see fit, accounting for the supermarket's viability, the borrower's financial circumstances and other factors that may never be disclosed. For this reason, it is essential that you compare your options before applying with a particular lender.
As a guide, the following loan terms could apply to a supermarket loan.
- Up to 70% of the value of the supermarket if purchasing freehold property with no additional security
- Up to 50% of the cost of fit-out if applying for a supermarket refurbishment loan
- Up to 50% of the purchase price, not including stock, if purchasing a leasehold supermarket
- Up to 100% of the loan amount required if additionally secured by residential property, such as your home or an investment property
- Up to 15 years if solely secured by the freehold supermarket property
- Up to 30 years if additionally secured by residential property
Interest rates can vary considerably and will be subject to the lender's policies and lending criteria. Interest rate discounts can apply if the loan is secured by residential property.
How do lenders assess supermarket loan applications?
Each lender will apply different criteria when assessing applications for supermarket loans. Additionally, the loan application process will vary depending on the purpose of the loan and whether you intend to run the business yourself or purchase the supermarket freehold as an investment.
Consider the following:
- Regardless of the loan purpose, you will require financial security and stability to make ongoing loan repayments in order to satisfy the lender.
- Be prepared to provide your personal financial records for at least the last two years.
- If you run a business, you will also need to provide full audited financial documents for the business, including profit and loss statements, for the last two years.
- If the supermarket is currently tenanted, the lender will need to be satisfied that the supermarket is in a strong financial position and the tenants have reliably paid their rent on time.
- If you intend to run the supermarket yourself, prepare a business plan with input from your accountant. The business plan should include cash flow forecasting and should mitigate any potential concerns the lender will have about the viability of the supermarket business
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