Commercial loans and business loans come in all shapes and sizes. Banks have created products to cater to the financing needs of property developers, importers, retailers and investors.
The downside is that it can get very confusing for business owners to work out exactly which loan product they need, what features will fit right for their situation and what rates they should be paying.
Did you know that the term of your commercial loan is typically determined by the security that you offer to the bank?
- 30 year term: Available only with residential property as security.
- 20 – 25 year term: Available from select lenders with commercial property as security.
- 15 year term: The most common term for commercial property loans.
- 5 – 7 year term: Typical terms for commercial equipment.
- Shorter terms: Used for short term business loans, invoice discounting and development loans.
Speak to our mortgage brokers by calling 1300 889 743 or fill in our free assessment form to see which business or commercial property loan is suitable for you.
It’s possible to negotiate interest only repayments with some commercial lenders. As a general rule they will only allow this if you have a large deposit and a strong enough cashflow to make the larger repayments when the interest only period expires.
- 15 year interest only term: Available only with residential property as security, from some lenders.
- 5 year interest only term: Available from select lenders for commercial property.
- 1 – 2 year interest only term: The most common interest only term for commercial loans.
- No interest only term: The option that most lenders prefer that you choose.
Did you know that with some types of commercial property loans you don’t need to make repayments? The interest can add onto the loan as long as your loan remains below a particular size or below a certain percentage of the property value.
This is most commonly used by property developers who are land banking for the future or who are deferring repayments until the sale of their development. This option is only available if you have a sound exit strategy and significant equity in the property.
Other business needs
Most banks prefer to take over all of your commercial facilities when you take out a commercial property loan. These additional facilities may be secured by either your property, a fixed and floating charge over your company or by other assets owned by the business.
- Overdraft: Typically secured by your property. Smaller overdrafts may be unsecured or only partially secured by property.
- Invoice discounting: Outgoing invoices are used as security.
- Equipment finance: The assets being financed are used as security.
Your lender may want you to also switch over non-debt business banking products such as merchant facilities and business bank accounts. This is so that you have a stronger relationship with the bank and are less likely to leave in the future.
It’s important to keep this in mind as it is more difficult to negotiate a better interest rate with a lender later on if they believe that you are unlikely to leave.
Terms & Conditions
What do you actually want?
The best place to start with your negotiations with a lender is to decide on what you actually want.
Many borrowers focus on low fees and a competitive interest rate because they don’t know what they can ask for!
What you should ask for depends on your needs as a commercial property investor or business owner.
- Lower repayments: Ask for a longer loan term or an interest only period.
- Smaller deposit: Ask for a higher LVR or an unsecured overdraft.
- Seasonal repayments: Usually it is best to ask for an unsecured overdraft.
- A reduced rate for a large loan: Ask for a bank bill facility.
- Additional repayments: Ask for a variable rate loan.
What does your business need? Speak to our mortgage brokers by calling 1300 889 743 or fill in our free assessment form and we’ll discuss some options that may help you to get what you want.
How much will they lend?
One of the most important aspects when deciding on a commercial lender is the amount that they will lend you. The amount that you can borrow will be limited either by the LVR of the loan (percentage of the property value) or your serviceability (ability to make repayments).
The LVR of your loan is typically determined by the security that you offer. However, different lenders will lend different amounts, so a good mortgage broker can help you to borrow more.
Your serviceability is determined by your interest cover ratio. This is effectively how many times you could afford to pay the interest on your debts.
For example, if you had an income of $100,000 and interest on your new loan would be $50,000 then you would have a 2x interest cover ratio. Most lenders require a minimum of 1.5x to approve your loan but since each has a different minimum ratio and a different method of calculating your ratio you may find the amount that you can borrow varies between lenders.
Commercial property loans are typically ‘set and forget’ meaning that as long as you make your repayments the bank will leave you alone.
However, business loans, large loans and specialised property loans normally have annual reviews. This is so that the bank can monitor the value of their security and your ability to make repayments.
From the banks point of view this allows them to work with customers that are experiencing financial difficulties. In reality, it means that they can pull the rug out from under you when you need them most by asking for additional security or for you to pay down the loan.
If you can, try to negotiate a loan without annual reviews to protect yourself.
Does your lender really need a personal guarantee? For some loans it’s unavoidable but for others you can negotiate the loan to be non-recourse so that the lender cannot claim other assets or try to sue you personally.
What are your future plans? Your ideal lender is one that’s going to be your business partner and grow your business by providing additional funding when you need it.
It’s a good idea to discuss your future plans with your mortgage broker so that they can plan out a finance strategy to either build a relationship with one main lender or to split up your facilities between suitable lenders.
Interest Rate Types
Variable rate loans are the most common type of commercial loans where the interest rate will move in line with the funding costs of the bank or the RBA cash rate. Unlike residential loans though, there are actually a few variations depending on the size of your loan.
If you have a smaller commercial loan then you can get a good interest rate by securing your loan on your home or investment property rather than a commercial property.
For larger commercial loans, you can get a good interest rate with a bank bill loan facility.
If you are concerned about interest rate movements then you can fix the interest rate on your commercial loan for up to 5 years.
The fixed rate terms are strict and often have limits on extra repayments as well as hefty exit fees if you pay the loan off early.
You can get the best of both worlds by putting a ceiling on your interest rate while retaining a variable rate that will drop if rates fall. This is known as a capped rate and, in most cases, you pay a few basis points more for the additional certainty.
This is most often used by businesses that know that, above a particular interest rate, they would be in financial stress. Capping the rate is effectively insurance against rising interest rates.
There is also another variation called an interest rate collar. This is where there is also a floor interest rate. The idea is that the premium for having a ceiling interest rate is reduced because the lender may benefit from you having a floor interest rate.
Paying the interest in advance
If you have a seasonal business or the need to claim an additional tax deduction this financial year then you may choose to prepay your interest for up to a year in advance.
This is also used in some situations where your ability to repay the loan isn’t yet proven yet you know you can provide the required paperwork within the next year.
Apply for a commercial loan
What features do you need for your commercial loan or business loan?
Our mortgage brokers are experts in commercial lending. Call us on 1300 889 743 or fill in our free assessment form to find out how we can help.