Your guide to commercial property finance [2021]

Like a residential mortgage, but designed to fund commercial property whether for an investment or your own business.

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Commercial Property Finance overview

Whether you’re looking to buy a commercial property for your business or as an investment, taking out commercial property finance can be a great way to get your foot in the door or expand an existing business.

Here’s everything you need to know about commercial property finance in Australia, from how it works to finding a reputable commercial broker.

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What is commercial property finance?

Commercial property finance is specifically designed to fund real estate used for commercial purposes, whether for your own business or investment.

It works similarly to a residential property loan with a few key differences that we’ll cover below, in regards to your rate, term and loan-to-value ratio (LVR).

How does commercial property finance work?

Commercial property finance requires a deposit, but it's typically higher than the standard 20% needed to secure residential property.

The minimum deposit for a residential property is 5%. In other words, you can borrow 95% of your residential property’s value. But a commercial property usually requires putting down a minimum of 20-30%.

Of course, the exact deposit required depends on your unique situation and the lender’s policy.

If you don’t quite have a 20-30% deposit, we can leverage off another property you currently own—this can either be residential or another commercial property.

It’s worth noting that not all forms of security are valued equally. For example, a standard property like an office, storefront or warehouse is considered a stronger form of security than a specialised property, like a childcare centre or service station.

This is because standard properties are easier to value and, should you default on your loan (touch wood), sell.

Alternatives?

Not every business has access to security. That’s where unsecured finance comes into the picture. It allows you to borrow without needing to put any assets on the line upfront, but be aware this comes at a cost: higher interest rates and sometimes less favourable terms.

The upside is that you don’t have to worry about losing your assets if things go belly up, and the application process is much faster than usual as you don’t have to value assets for collateral.

Commercial loan vs residential: How are they different?

Commercial property loans differ to residential loans in regards to their terms, fees, rates and deposit amounts. Rates tend to be higher and there are usually more fees involved (such as legal costs and application fees).

A higher deposit is also required (generally a minimum of 20%) and loan terms typically range from 15 - 30 years. Residential property loans, on the other hand, have standard loan terms of 30 years.

The exact rate and deposit required will depend on factors such as whether you’re taking out an investment or owner occupied property, and the type of rate you choose (i.e. variable or fixed).

What are commercial property loans used for?

Commercial property loans can fund any premises used for business purposes, including offices, retail stores, warehouses, factories, galleries, gyms and other recreational facilities.

Rates and deposits vary depending on the type of property you’re buying. ‘Standard’ properties are preferred by lenders and therefore cheaper than ‘specialised’ properties.

Standard properties are those that can be used by a range of businesses due to their versatility, and are therefore in greater demand. They are cheaper to finance than specialised properties as they appeal to a wider pool of tenants. They include the following spaces:

  • Factories
  • Warehouses
  • Offices
  • Shop fronts
  • Storage units

Specialised properties are less versatile and therefore attract a narrower pool of tenants, making them more expensive to finance. Generally you can only borrow 50-65% of the property’s value if it is specialised. They include the following spaces:

  • Hotels
  • Service stations
  • Childcare centres
  • Car yards
  • Supermarkets
  • Restaurants
  • Pubs
  • Farms
  • Aged care facilities
  • Gyms are other recreational facilities

Aside from the type of property you’re looking at and associated level of demand, the location it’s in will also be considered by lenders as this further determines risk.

In fact, some lenders will only approve funding for properties falling under specific postcodes. Rural properties, for instance, are considered higher risk than those in metropolitan areas.

They will therefore come with a higher rate and tighter eligibility criteria.

Types of commercial property loans

Full-doc

Full-doc commercial property loans require a complete assessment of the borrower and relevant applicants or guarantors. This means providing all income and liability documents (e.g. financials, tax returns and bank statements).

Full-doc loans require more work and documentation upfront, but as a result, also come with more competitive rates.

Low-doc

As the name suggests, low-doc loans come with considerably less paperwork. You (or your accountant) will simply declare your total income and that you have the ability to make repayments.

This offers businesses with low profit margins more choice and flexibility, allowing them greater access to finance (typically through non-bank and alternative lenders).

Lenders who accept low-doc applicants take on more risk, and as a result charge slightly higher interest rates. However, the application and approval process is typically much quicker.

No-doc

To qualify for a no-doc loan, you’ll need a strong exit strategy—meaning enough security for lenders to recoup losses should you default on your loan.

That’s because no-doc loans require zero documentation and accountant declarations. Again, the application process is much quicker than full-doc loans (and even low-doc loans) but the interest rate will be higher to justify additional risk.

Eligibility for commercial property loans

While your eligibility for commercial property finance depends largely on your lender and their criteria, there are a few things you can do to increase your odds of an approval:

  • Have either a deposit of at least 20%, or available equity in an existing property or eligible asset
  • Check on your credit score to make sure it’s in good shape (above 700 is ideal). Valiant can carry out a soft check for you, meaning we can find out what your score is before you apply for finance. This is a good way to keep your credit score safe, as a declined application can damage it
  • Be clear on why you’re taking out finance and how the property you’re purchasing will add value to your business (lenders will be curious, too)
  • Get relevant documentation in order

Documents you’ll need to apply for commercial property finance

Again, requirements vary from lender to lender, but most will ask for the following documents in addition to your commercial property finance application form:

  • 100 points of identification
  • Contract of sale if you’re purchasing a new property (as opposed to refinancing)
  • Evidence of your deposit
  • Documents to prove your income, such as financial reports, tax returns, pay slips and other documents as required

Other types of commercial finance

In addition to your commercial property, you might also need to get your hands on new business assets, or a loan to fund renovations and fitouts. Our commercial lending experts are here to help with all your finance needs, to ultimately bring your vision to life.

Get in touch and we’ll help you pick the perfect finance solution, tailored to your unique business. In the meantime, here’s a snapshot of commercial financing solutions available in addition to property loans:

Equipment finance

Recommended for commercial vehicles, heavy machinery and office equipment.

What is it: Equipment finance (also known as asset finance) is designed specifically for funding equipment, whether that be a vehicle, machine or other business-critical tool. There are a few types available—some let you use equipment without having to commit to ownership, while others let you own the asset from the get-go.

Pros:

  • No assets? No worries—there are options for those who don't want to put their existing property or equipment on the line. The asset you're borrowing can double up as collateral
  • Flexible options for different business needs: whether you're looking for a temporary solution, ability to upgrade or buy the asset at the end of your term, there's something for everyone
  • Improve cash flow: by financing your asset, you have more money to use for business growth and day-to-day running
  • Avoid depreciation: certain assets get old, fast. If you're planning on using yours for a shorter period of time, you can get it off your hands before it depreciates significantly

Cons:

  • You don't have complete ownership (or at least full title) over the goods until you've paid your asset off in full. For this reason, there could be restrictions on how you use your asset. You also can't alter or modify it
  • Interest rates and fees apply
  • Early repayment fees can apply
  • If you default on your loan (i.e. become unable to continue making repayments) your lender will take the asset from you to recoup losses incurred

Secured and unsecured loans

Versatile option recommended for both short and long-term needs, whether it be for renovating, hiring or cash flow.

What is it: Secured and unsecured term loans are standard types of finance where the borrower receives a lump sum and pays it back over a set term (with interest added). Secured loans require collateral, whereas unsecured loans don’t require any assets upfront.

Pros:

  • Versatile funding options to suit different needs
  • Unsecured loans do not require security and are quicker to approve
  • Secured loans come with lower interest rates

Cons:

  • Secured loans require putting assets on the line and potentially losing them if things go belly up. They also take longer to apply for, however, Valiant can streamline the application process to speed things up
  • Unsecured loans come with higher interest rates and less borrowing power i.e. shorter terms and less available cash

Line of credit

Recommended for businesses who need flexibility.

What is it: A line of credit allows you to access funds without needing repeat approvals from your lender. You and your lender will agree upon a predetermined amount of money that you can withdraw as needed, and you’ll only pay interest on what you touch.

Pros:

  • Gives your business peace of mind and a safety net in case you ever need money quickly or unexpectedly
  • You only pay interest on the money you withdraw, making a line of credit good value and an attractive option
  • There is no set term on a line of credit—you can withdraw funds as many times as you like within an agreed-upon period of time

Cons:

  • Discipline is needed as it can be easy to use a line of credit more than necessary
  • Fees and charges are often involved, including an establishment fee you'll pay upfront and an ongoing monthly fee
  • Compared with other types of finance (like personal loans, business loans and unsecured finance), a line of credit requires more paperwork than usual for approval

Trade finance

Recommended for businesses who have multiple clients or need a hand managing gaps in cash flow.

What is it: Trade finance lets you pay exporters upfront before goods have arrived. You'll receive the funds you need through your lender while your suppliers are paid on time. Then you can pay your lender back over a longer, more favourable term.

Pros:

  • Bridge gaps between incoming and outgoing payments to keep your suppliers happy
  • Pay your lender back over a longer period of time and more favourable terms

Cons:

  • Short-term solution
  • Each trade loan is for one shipment, so you'll need to take out a separate trade loan for each transaction

Finding a commercial finance lender: What to look for

They should be reputable You want a lender with a good reputation who will support your business and treat you as a valued customer, not a number.

The best way to find out if your lender is reputable is to do your research and filter through customer reviews. If you find more complaints than satisfied customers, you might want to look elsewhere.

Are their products good value? Check the lender’s interest rates, terms and fees and compare them to others. Remember that a low interest rate doesn’t necessarily mean you’re getting the best value. Low interest rates can sometimes come with higher fees, or less favourable conditions, and vice versa.

Finding a great rate, lender and product that works for you is quickest and easiest through a third party, like a broker.

Make sure they’re right for you Finding a good lender is essential, but are they the right lender for you? Some will understand your industry and market better than others, so it’s important to make sure the lender you choose is onboard with your business, understands how your market works and can support your goals.

Valiant’s commercial lending experts can help you find a lender who’s not only reputable, but a good match for your business and market.

Finding a commercial finance broker

Commercial finance brokers have the industry knowledge and expertise needed to help business owners, like you, understand their financing options.

The right commercial loan for you will depend on your unique needs and business goals. A commercial finance broker knows the ins and outs of business lending, has connections with a range of lenders and is qualified to help you find a financing solution that works.

Here are a few tips to keep in mind when finding the right broker for you:

  • Look at reviews online and see what customers have to say about their experience
  • Make sure the broker you’re dealing with is reputable and qualified. Commercial brokers should be certified with a certificate 4 in mortgage broking, and have accreditations with an aggregator and association.
  • Find out what their average time to funding is. A good broker should not only help you find a rate you’re happy with but offer a good turnaround time (this is one of the perks of finding finance through a broker rather than a bank or lender directly)
  • Find out who they’re partnered with and how many lenders they have on their panel. Valiant currently works with over 80 lenders, from big banks to smaller fin-techs and alternative lenders. This means we can give you access to a diverse lending panel and tailored solution

Our brokers are not only qualified and accredited, but highly specialised. They also offer an end-to-end service, meaning they not only find and negotiate a great deal on finance, but apply and settle funding on your behalf.

To give you an idea of our turnaround: from your initial enquiry with us, we can have finance approved and settled in as little as 24 hours. Depending on the type of finance you need, it can take a little longer than this, but we essentially allow you to cut through the red tape experienced when applying through a bank.

For all enquiries, get in touch with our friendly team on 1300 780 568 or by entering a few basic details online. We’d love to lend a hand!

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