Whether you’re starting a new business or expanding an existing one, finding the right premises can be crucial to success. The wrong property can deprive you of the desired results. To add insult to injury, it can also saddle you with a debt that you’ll find challenging to repay.
When you find the ideal property for your business, you might not be able to pay for it outright. It might not even make sense to pay cash. All successful businesses know how to leverage. Rather, you’ll need a commercial loan. But how do you choose the right option?
There are a few things that you need to keep in mind when looking for the best type and structure of your commercial property loan. You’ll see below the best options available to business owners and how they work. But before that, let’s take a look at the definition of a commercial property loan and how it differs from a residential mortgage.
What Is A Commercial Property Loan?
The first thing that you need to think about is the purpose of taking out a loan. This is important not only for your own planning but also the approval of the loan. Lenders will want to make sure that you’ll be able to put it to good use.
In general, there are two purposes for getting a commercial property loan:
- Buying as an investment – This is where you buy a property for the purpose of leasing it out to a third party. For this purpose, lenders see you as a low-risk borrower. This translates to a simpler application process, as well as lower interest rates.
- Buying as an owner-occupier – This means you’re buying the property for use as your own business premises. As for the other assets, you assume the ownership and use them for your own needs. From the lenders’ perspective, an owner-occupier loan is more likely to be less risky as the lender gets to see the business financials. Whereas with an investment loan, the bank only knows that there is a lease in place and the tenant may be paying their rent, but they could go broke at any time. Owner Occupier loans typically attract lower or the same interest rates as Investment Loans.
As you can imagine, the process of getting a commercial property loan can be much longer and more complex than taking out a residential loan. There are a few options at your disposal, so let’s take a closer look at the most popular loan types.
- Term Loan
This is the most common and straightforward loan type as it’s not unlike many consumer loan products. In essence, you get a lump-sum payment to finance your premises. Depending on the features of your contract, you’ll repay the loan following an agreed-upon structure over a certain period of time, even if you don’t use your loan.
A prominent feature of term loans is that banks will usually give you a choice between a fixed and a variable rate loan. With an eye on future interest rates, this can allow you to plan your repayments and potentially minimise the cost of the loan.
In addition, many lenders offer a flexible repayment model that you can adjust to your business needs. This often comes with a variable interest rate and you can choose how much and when to pay.
- Refinancing
This option is another that’s available in both the residential and commercial spheres. However, it’s only possible if you already have a commercial property loan.
There are several reasons why you may choose to refinance a loan. For example, you may want to access a better interest rate. Your existing lender may offer this if you have a good track record for repayment on the existing loan. Or, you may wish to free yourself from the existing loan to take advantage of a better offer elsewhere.
Beyond allowing you to get better terms, refinancing also allows you to access the equity you’ve built in the property. This could free up some money to help with cash flow issues in a small business. Or, you could use this money to help you acquire another commercial property.
An example of the latter case may see you refinance an existing loan to access the equity. You then take out a term loan to buy the new commercial property while moving forward with the refinanced loan on the existing property.
You could also use this strategy to take cash out of your existing loan entirely. This may help you to fund other business activities.
How To Find The Right Product?
Even if you can use any of the above options to finance your new premises, not all of them will fit your current situation and goals. The option you’ll go with mostly depend on your specific business needs and loan serviceability.
Here are the most important aspects to take into account when making your final decision:
- Interest And Fees
It goes without saying that the interest rate can have a huge difference in the long run. A small difference in interest rates can translate to thousands of dollars either way. The first thing that you should do when choosing your financing option is to compare interest rates, but this isn’t the only cost that comes with commercial loans.
The fees can add up and offset any savings in a lower interest rate. Aside from a one-time application fee, you might have to pay monthly or annual fees. Make sure to get your math right by taking into account all expenses.
- Repayment Schedule
Like any loans, you need to be realistic about what you can afford. The best way to do this is by creating a budget that you can set aside and then finding a loan that fits the budget.
For example, you might not be able to afford both principal and interest in the first few months or years. If this is the case, you’ll want to go with an interest-only loan where you only have to pay the interest during the initial period.
- Loan Limits
Almost every lender has a minimum and maximum amount of money that you can borrow over a certain period of time. In general, a small business might be able to take out anything between $200,000 and $5 million. Of course, the actual amount will depend on your own situation.
In addition, you need to consider the maximum LVR (loan to value ratio) that you can get. The “value” part of this equation here is the value of the property as assessed by the lender.
For example, if the value of your property is $1M and you borrow $800k, your LVR is 0.8 (80%).
Your chances of getting an approval are higher if you can lower the LVR, but that would usually mean a higher down payment.
If you are considering the purchase of a property and will take it over on settlement as ‘Vacant Possession’ ie. its empty when you buy it – you will have to pay GST on the purchase and you will need the cash for this. A bank will only provide you finance on the EX GST value of the building. So, if the contract is $800,000 and is vacant, then GST will apply. This means the value of the property is actually $727,000 approx. and a loan of 70% means you will have to come up with a Deposit of $218,100 PLUS the GST amount of $73,000 and the stamp duty on purchase which could be as much as $32,000.
So, for an $800,000 purchase which is vacant on possession, your cash requirement may be:
| Deposit Required | $218,100 |
| Stamp Duty | $32,000 |
| GST | $73,000 |
| Total | $323,000 |
As you can see $323,000 is the actual cash required – much higher than the initial 30% of $800K ($240,000) that you thought you needed.
Be Diligent
As you can see, there are several sources of financing that you can use to purchase your new premises or finance any other aspect of your business. Each technique offers up its own pros and cons. You need to decide what’s best for your business before you move ahead.
Remember that you don’t get a chance to start over if you choose an unsuitable product. Make sure to scrutinise every little detail so that you don’t get caught out. Defaulting on a loan can cause all kinds of financial trouble and might even cost you your business, so examine every feature thoroughly.
To guard against missing anything, it’s best to engage the expertise of your finance broker. They can crunch the numbers and show you the exact product and repayment model for getting the most out of the loan.
If you want to find a tailored solution for your business, a good starting point would be to complete this short application quiz and one of our team will respond within 24 hrs.
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