With the average commercial loan in Australian being over $1,000,000 (source: Real Commercial), Commercial Property Loans come with their own set of rules and are vastly different to regular home loans. Small business owners and their cash flows are held into a higher account as the current up front cash rate required is higher than a home loan. It could be argued that it is slightly harder to obtain a commercial property loan in the Australian market.
If you are buying a simple investment such as a warehouse, office or shop front, banks are great at giving leaner rates, whilst being able to offer more flexibility in your policy. Often the banks carry their own commercial loan products and packages too. With smaller banks, they often have added policy flexibility, and work with you to look at alternative ways to secure your loan, however are not able to offer leaner fees than the main banks.
And the deposit? Home loans can be approved with only 10% of the cash upfront, however the general rule of thumb for commercial loans is 30% – 40%, meaning you can borrow not much more than 60% – 70% of the property – in other words, if you are buying a $1 million commercial property you will need a 35% deposit by way of savings or even possibly equity. The lowest risk properties are mainly investment properties such as refinancing commercial properties for rental purposes, and the business that will grow as the business grows using working capital to fund your businesses day to day operations are considered the highest risk.
The amount you can borrow also comes down to a unique method that banks will use to review commercial property loans, and is extremely complicated because every applicant along with the security they can provide is unique. Putting your best foot forward is paramount and by showing your strengths to the bank whilst entering in as much information as you can into your application.
Things banks will consider:
* Your Income and net position
* Property condition, overview and security
* Purpose of property
* Those involved in your application (lawyers/partners etc)
* Your past investments
Lenders’ Mortgage Insurance is not offered to borrowers as it is to Home Loans, and shorter lending periods is the standard, as a $1m loan is often required to be paid off over 10-15 years – around 1/2 of the time of a home loan for the same amount.
The banks review your financial position frequently, and need to access your yearly financials such as BAS statements and profit and loss statements. This is to ensure your business is able to pay off the loan and asses your liability.
Lastly, commercial loans are offered at fixed or floating (variable) rates, in the same way as a home loan. A fixed rate is best for those who need the stability and consistency of a fixed rate, and are more risk-averse. Variable rates are best for those who want to make additional payments and feel their business can sustain any ebbs and flows.
There you have it, a short and sharp guide to Commercial Property Loans – what to consider, what to look for and what to keep in mind. Starting a business always takes guts and determination, takes time and requires absolute commitment to that business. From this point of view, this is why banks and lenders take a tougher approach on those seeking loans.
We would love to hear your thoughts and experience if you have ever taken out a commercial loan, thought of taking one out or are in the process of taking out a commercial loan.