There comes a time in every business’s growth where it will require a commercial real estate loan to take it to the next level. This loan may be necessary for opening your first brick-and-mortar store, expanding to a new location or renovating your existing office or factory to improve operational processes and efficiency. The commercial lending process may seem more convoluted than the residential mortgage process, but aside from a few stricter requirements, features many of the same lending criteria.
Lenders will still look at your business’s capacity to repay, available deposit and equity, and your net worth and income, just as they would with a residential mortgage application. If you have been considering a commercial real estate loan, read through this guide to familiarise yourself with the processes and conditions before contacting a commercial broker.
Choose a Specialist
Commercial loans are generally harder to find and can be far more complicated than the average mortgage. Banks will often include restrictive conditions in their commercial lending products, while greater freedom and tailored solutions are available through specialised financial brokers. These brokers have connections with lenders who specialise in commercial lending, allowing you to gain access to competitive deals.
Larger Deposits are Required
Commercial real estate loans have a lower loan-to-value ratio, with residential borrowers generally being able to borrow up to 90% of the value of the property (LVR) but business-owners only being able to borrow 70% LVR.
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Shorter Loan Terms
The loan term for a typical mortgage is 30 years, while for commercial properties, it will generally be 15-20 years. This means commercial borrowers will need to demonstrate a greater capacity to repay, because the repayments will be higher and paid down in a shorter time frame. The more in order your accounting is, the stronger a case you can build for your serviceability.
Higher LVR, Higher Interest Rate
Lenders often see businesses as being riskier than individuals, particularly new businesses and those without extensive financial records to demonstrate their trustworthiness. Because of this, the higher your LVR (i.e. the percentage of the property value you need financed), the higher your interest rate is likely to be. The lender has more to lose in this scenario, meaning they need to cushion themselves against any potential fallout. However, if you have a larger down payment prepared, you will likely have a lower interest rate on your loan.
Different Repayment Options
The average mortgage is categorised as an amortized loan, which gets repaid in fixed instalments until you’ve paid the full amount plus interest. Commercial loans may be amortized, but could also be available as a balloon loan. This means you need to make one large payment at the end of your term to pay off the remaining principal. Consider your business’s cash flow to determine whether periodical payments suit you best, or a large one-off payment. Only commit to a balloon payment if you know you will have a large sum of money on hand at the end of your loan term!
What to Prepare for Your Application (Commercial Loans Application)
If you’ve decided that your business will benefit enormously from a commercial loans (real estate loan), make sure to have all your paperwork in order before embarking on your application. Having a thorough business plan is essential, as lenders will need to see that you have a viable chance of success and that the property you are intending to buy will increase your profits. You will also need to demonstrate your business’s financial strength, so have financial documents like tax returns and asset statements on hand. Remember that the lender is taking a chance on you and your business, so you need to present a convincing case to them.
A commercial loans for real estate bears many similarities with a regular mortgage but will require you to demonstrate a greater capacity to repay your loan in a shorter time frame and necessitates a higher deposit and equity. Because of the greater complexity involved, it is essential to acquire your commercial real estate loan from a specialist broker who has extensive connections with lenders.
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