The DEFINITIVE Guide to Commercial Property Loans

Commercial property loans sound complex! We hear stories of how hard they are to get, the long list of criteria that banks and lenders have, the supposed higher deposits and the excessive documentation that is required to get these loans. Are commercial property loans worth it? What’s the difference between the different types of loans? Can it actually help me with my property investing journey?

Reservoir Finance’s Definitive Guide to Commercial Property Loans will explore all the key concepts and basic of commercial loans for property in Australia. Have a read and let us know what you think! If you have any more questions, please do not hesitate to contact us! (Obligation free)

Reservoir Finance is an independent commercial mortgage broker committed to helping Australians achieve their personal and financial dreams sustainably. You can learn more about our values here. (PS: if you do choose to work with us, you’ll be in good hands! We do not charge upfront (or any) fees to 99% of our clients!)

What is a commercial loan?

A commercial loan is a type of loan that is used to purchase or refinance commercial properties. These loans are typically offered by banks and other financial institutions and can be used for a wide range of commercial properties, including offices, warehouses, factories, retail spaces, and more.

A commercial loan can also be used for business expansion or working capital. Commercial loans are generally larger and more complex than personal loans or residential mortgages, and as a result, they often come with stricter lending criteria and higher interest rates.

Commercial property loans are different to commercial lending as commercial lending (or business loans) is suited for businesses who need to access financing for activities such as expanding their business, cashflow or purchasing inventory.

What are the different types of commercial loans?

There are several different types of commercial loans available in Australia, including:
  • Owner occupied commercial property loans
  • Investment commercial property loans
  • Development commercial property loans
  • Owner-occupied commercial loans

    Owner occupied commercial property loans are for businesses that will occupy the property as their primary place of business. This can include office buildings, retail spaces, warehouses, and other types of commercial properties. Owner-occupied commercial loans are often considered less risky than other types of commercial loans because the borrower is likely to have a vested interest in the property and will be more motivated to make the loan payments on time. As lenders view owner occupied commercial property loans more favourably, they are typically more lenient and may allow higher loan to value ratios (LVR) compared to investment commercial property loans.

    Investment commercial loans

    Investment commercial property loans are for investors (including individuals) who want to purchase a commercial property for rental income. This can include office buildings, retail spaces, warehouses, and other types of commercial properties. Commercial property investments are considered to be riskier than owner occupied commercial purchases as the borrower is perceived to have less vested interest in the property and may be more likely to default on the loan. As such, lenders will typically require a higher deposit (a lower LVR) for investment commercial property loans.

    Development commercial property loans

    Development commercial property loans are for developers who want to construct new commercial property or renovate an existing one. This type of loan is usually used by developers to finance the cost of buying land, designing and building a new commercial property, or renovating an existing one. Development loans are considered to be high risk as there is greater dependency on the success of the project as well as the overall condition of the real estate market at the time of completion. As a result, there are a very small number of bank lenders that offer and facilitate development loans. The lenders that do offer development loans will have strict criteria as well as an even higher deposit requirement (a lower LVR) compared to other types of commercial loans in order to mitigate the banks’ risks.

    How much deposit do you need to put down for a commercial loan?

    The deposit required for a commercial loan will vary depending on the lender and the type of commercial property you are purchasing. For a lower risk commercial loan, a deposit of at least 20% of the property’s value (not purchase price) is required, but this can vary depending on the lender’s risk appetite. We have also seen lenders requiring a deposit of up to 30% or more of the property’s value. Just like residential property loans, a higher deposit will generally result in more favourable terms and lower interest rates.

    How is a commercial loan different from a residential home loan?

    Commercial loans are typically used to purchase or refinance commercial properties, while residential home loans are used to purchase or refinance residential properties. The terms, interest rates, and requirements for commercial loans are typically different from those for residential loans.

    Commercial loans are generally larger and more complex than residential home loans, and as a result, they often come with stricter lending criteria (such as restrictions on the type of business or asset class you can buy with the loan) and higher interest rates which affect loan repayments. We have a commercial loan repayments calculator where you can enter the terms of the loan to understand the monthly repayments.
    The assessment criteria is more complex as lenders dive more deeply into the financial situation of not only the business but also the property owners and / or the guarantors of the loan.

    Additionally, commercial property loans typically have shorter loan terms (anywhere from 15 years to 30 years) and may have different tax implications, and some lenders may also require annual reviews of the business performance over the loan term.

    There are certain scenarios where a commercial property loan may be easier to receive pre-approval for than a residential loan. This is highly dependent on the panel of lenders that your commercial mortgage broker has access to. It is best to speak with a specialist commercial mortgage broker such as Reservoir Finance, to understand your personal and financial situation. We would love to partner with you and help you with your commercial property purchase.

    Who can get a commercial loan?

    Commercial property loans are typically available to businesses and investors who want to purchase or refinance commercial properties. A common misconception is that commercial loans are only available for businesses when in fact, commercial loans are also available for individuals to apply and use to purchase commercial property.

    Some lenders may have specific requirements, such as a minimum credit score or a certain amount of revenue or additional security in order to secure the loan. Additionally, some lenders may require that the borrower have experience in the commercial real estate industry, have a solid business plan in place or that your financial situation and net worth exceeds a certain threshold. However, it is important to note that there are lenders who also specifically cater to small and medium businesses, so it is always worth exploring your options with an experienced commercial loans mortgage broker such as Reservoir Finance.

    What are the interest rates on a commercial loan?

    The interest rates on commercial loans will start from 6% per annum and can exceed 10% per annum. The interest rates on commercial property loans will vary depending on the lender, the type of loan, and the creditworthiness of the borrower. Generally, commercial loan interest rates are higher than those for residential property loans, as purchasing commercial property is considered to be higher risk than purchasing residential property. You can learn more about the current market commercial loan interest rates and how they are set here.

    What are the requirements for getting a commercial loan?

    The requirements for getting a commercial loan will vary depending on the lender. A few of the requirements that most lenders have include:

    In providing proof of income, lenders may require the borrower to provide personal and business tax returns, business financial statements, and other financial documentation.

    How long does it take to get a commercial loan?

    Getting approval for a commercial loan can take several weeks or even months. It ultimately depends on the lender you seek finance from and the complexity of the loan application. It is important to have all of your paperwork and documentation in order as well as being prepared to answer any questions the lender may have about your purchase.

    The lenders’ assessment process will generally include an assessment of the commercial property (including a valuation and reviewing the lease agreement(s)), the borrower’s financials, as well as a credit check on both the business and the owners and/or guarantors. Once the lender is satisfied with the information provided, they will make a decision on whether to approve the loan.

    Some lenders (especially the major banks) have favourable policies for commercial property purchases if you are borrowing less than $1 million for a commercial property loan. These favourable policies mean that the lenders may actually require less documentation to prove income and serviceability. For example, one of the major banks requires only one recent Business Activity Statement (BAS) and a signed self-declaration to be considered as evidence for proving business income in order to get a commercial property loan.

    Please speak with Reservoir Finance if this is of interest to you. We want to ensure the loan is fit for you and your business’ goals and situation.

    Do commercial loans have any special features?

    Some commercial loans may have special features, such as interest-only payments or the ability to make extra repayments without penalty. These features can make the loan more flexible. Additionally, some commercial loans may also offer line of credit facilities, which can help your business manage its cashflow.

    What is a General Security Agreement (GSA)?

    A general security agreement (GSA) is a legal document that allows a lender to take security over a borrower’s assets in the event that the borrower defaults on the loan. This can include commercial properties, vehicles, business assets and other assets. This means that if the borrower defaults on the loan, the lender has the right to seize the assets listed in the GSA in order to recover the loan amount. We have seen GSAs where the beneficial owner may need to put up their own principal place of residence as security in the general security agreement in order to be approved for a commercial property loan.

    What documentation is required for a commercial loan application?

    The documentation required for a commercial loan application will vary depending on the lender and the type of loan, but typically includes:

    • Personal tax returns (for income details)
    • Business tax returns
    • Business financial statements (such as business activity statement and balance sheet)
    • Bank statements
    • Business plan in some cases
    • Lease agreement for the commercial property being purchased
    • Accountants letter

    It is important to have all of your documentation in order before applying for a loan, as this can help to speed up the process. It is best to work with a commercial property loan mortgage broker such as Reservoir Finance in order to ensure that you have all the required paperwork.

    How can a commercial loan help me build my property portfolio?

    A commercial loan can be a powerful tool for building your property portfolio. We typically see more mature and established investors purchase commercial property in order to diversify their property portfolio and take advantage of the many benefits that commercial property investing offers.

    By using a commercial loan to purchase or refinance commercial properties, you can take advantage of the steady rental income that commercial properties offer.

    Owning commercial properties is typically used as a hedge against inflation, as the lease agreements will generally factor periodic increases in rent that is indexed with inflation. This helps older investors as well as it can provide a steady source of income in retirement.

    How can Reservoir Finance help you with a commercial property loan?

    Purchasing commercial property can help level up your investment portfolio, empower your business or help deliver higher multiple returns on your investment. To achieve this, businesses and investors will generally access finance through commercial property loans.

    Due to the complex nature of getting approved for a commercial loan, it is advisable to be working with a commercial property loan mortgage broker such as Reservoir Finance. We are an independent (not owned by banks) commercial loans mortgage broker based in Sydney and services all Australians, anywhere.

    Our values based approach of responsible borrowing (not lending) aims to help you understand the risks and requirements involved before applying for a commercial loan. Our role as the commercial property loan mortgage broker is to understand your personal and financial situation in order to provide you with different loan options from different lenders.

    We will also help you in ensuring all the necessary paperwork and documentation is completed and compiled in a way that will help the loan application process go as smoothly as possible, putting you in the best light to be approved by lenders.

    We are keen to work with you and would love to hear from you. We are so confident that we do not charge upfront (or any) fees to 99% of our clients. We even offer a free strategy session where we help analyse your financial situation, your goals and provide you with recommendations on how to achieve them. It is obligation free! If you have any questions or are keen to work with us, contact us below or feel free to call us on (02) 8288 9123. We would love to help you out!

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