Commercial loans are often a necessity for many business owners if they want to expand but don’t have the means to invest. Commercial property loans are a type of finance that can be taken out by individuals, partnerships or discretionary trusts on behalf of a business or company. A commercial property is any property or land that has been council zoned as industrial, commercial or retail.
These loans come with their own unique set of rules and factors that affect how much you can borrow and what you’ll repay. It’s important to find the right financing solutions to help your business grow in the way you have envisioned. If you are looking to invest in equipment, staff or premises that can help develop your business operations then a commercial investment loan may be the solution.
How does a commercial investment loan work?
Commercial investment loans allow you to choose products that have variable or fixed rates, or a combination of both. The flexibility to decide on principal and interest or interest-only repayments is also possible. Most investors prefer interest-only repayments due to the potential tax benefits. Commercial loans can also feature a line of credit facility which can be useful as commercial buildings usually cost more to maintain so you really want to have access to your funds for upgrades and maintenance.
If you need help on deciding how to structure your loan, get in touch. We have a wealth of experience to share with you.
Commercial investment loan options
Some of the most common commercial loans available include:
- Subdivision finance-this finance can be used for new construction works and subdividing an existing property
- Buying or refinancing commercial property- this loan is best suited to the first-time commercial property buyer
- Property development and construction loans- these loans have been designed specifically for investment property developments.
- Mezzanine debt finance- this loan is normally utilized when the original loan falls short of the total costs of the expansion.
- Buying or refinancing a business- a loan tailored to investing in an established business.
- Factory finance-this loan can help your business expand by purchasing equipment and technology and can help you utilise your capital to meet other expenses while funding your working capital requirements.
- Landbank finance- ideal loans if you are looking to double your investment by developing vacant properties into marketable assets.
- Rural property loans- You could use this loan to consolidate your debts or as its name suggests purchase property in a rural region.
What should I look out for when comparing the different commercial property loans?
The loan terms will be different for each lender, generally, you will find lenders offering loans between one and seven years at variable rates and between one and five years at a fixed-rate.
Make sure your lender offers flexible repayment structures such as the option to pay interest-only repayments during seasonal lows. This repayment flexibility means minimal impact on your business’s cash flow.
Interest rates and fees on commercial investment loans
As with other terms of finance, there are various fees that you will need to consider some are once off and upfront such as loan establishment fees others will be ongoing administration fees. Generally speaking, because commercial loans are considered higher risk you can expect interest rates and fees to be higher for commercial loans compared to residential home loans.
Your ability to qualify for a commercial investment loan depends largely on the lender’s eligibility criteria. Banks normally impose stricter lending criteria on commercial property loans and will usually request detailed property valuations accompanied by additional supporting documents. Serviceability of this loan will be assessed.
This is a different calculation based on the interest cover, which examines surplus income after you’ve paid all other expenses, compared to the debt repayments for the loan. Commercial property is considered to be more difficult to sell should the applicant default on repayments therefore tighter lending terms can be seen in the lower loan-to-value ratios and higher interest rates.
How to apply for a commercial investment loan
In the commercial world, you will need more upfront cash. While lenders will agree on more than 90% of a property purchase price on a small commercial loan of up to $1 million, the maximum you can generally borrow is about 80% of the property’s price. If you have other property to offer as security, this can potentially be negotiated unless it’s a single security deal in which case 80% would be the maximum. For loans above $1 million you can anticipate receiving the loan-to-value ratio rate of below 75%.
Loan pricing will vary based on the nature and location of the business, security and the gearing level. Lenders do not want to take risks and if you demonstrate that you’re willing to take on some of the risks yourself, you’re likely to get the maximum discount on your home loan.
You can do this by using your residential property as security for the commercial loan which reduces your loan to value ratio or by purchasing real estate or land that is not purpose built for a specific commercial purpose. Standard property means it’s easier to resell.
Commercial properties typically experience higher vacancy rates so if you’re buying a standard commercial property with a reliable tenant and at least a couple of years remaining on the lease, you have a strong chance of getting approved.
Advice, tips and considerations
Every commercial property agreement will be different so remember not to overlook applicable zoning laws, development plans and check that the property has a clear title.
Investing in commercial property is a significant commitment so do not be afraid to incorporate the advice of experts, such as lawyers, accountants and mortgage brokers to evaluate the risk and benefits of this transaction. Check every detail of the sales agreement to be aware of your rights and obligations.
As loans get larger, the bank will want regular access to your financials to ensure you remain in a solid financial position to repay your loan so make sure your financials remain up to date and accurate.
Frequently asked questions
How often are valuations done?
If you show that your loan is being paid down valuations are not done as often. For small loans (under $1 million or the LVRs under 50%) and standard commercial properties, valuations are usually undertaken every 3-5 years.
Who pays for the valuations?
Every time your property is evaluated the property owner bears the costs for this. Commercial property valuation costs are significantly higher than residential. So, when planning your investment strategy be sure to include these costs they typically range anywhere between $1,000 to $2,000 or even up to $20,000 for a purpose-built property like a pub or an aged care facility.
Can I borrow 100% of the property value?
Purchasing commercial property is usually higher in value than residential property so finance for a commercial loan is less accessible. As a result, you typically need a 30% deposit to gain approval for a commercial loan. However, if you have a guarantor or sufficient equity in an existing residential property to cover the deposit then you may qualify for 100% of the property value.
Below is a guideline to lending values
Commercial property loans from $5,000,000 to $50,000,000 are assessed case by case for loans up to –
- $1,000,000-80% of the property value.
- $2,000,000-75% of the property value
- $5,000,000-70 % of the property value
What can I do to avoid lenders mortgage insurance?
Lenders Mortgage Insurance (LMI) is usually a condition of the loan which protects your lender against your default in repayments. It is a once-off insurance payment and commonly paid when more than 80% of the value of the property is borrowed from the lender by a buyer. In other words, the Loan to Value Ratio (LVR) is 80% or more. To avoid paying this extra insurance save at least 20% for the deposit and if possible have someone guarantor for you.
What will I expect differently with a commercial loan as opposed to a residential loan?
Goods and Services Tax (GST)- when buying a commercial property, you need to factor in 10% GST on the property price. You are able to claim this back as “input tax credit” against the GST charged on the property’s rent but it still needs to be paid upfront. When you sell a commercial property that has been used for business purposes, it will be subject to capital gains tax. To determine your capital losses or gains, you will need to keep up to date financial records.
Need assistance? We can help
If you need advice on commercial investment loans or unsure how to structure your loan call one of our advisors now