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Factory Loan

It’s fair to say that Australia is no longer the industrial force in the world that it once was. That’s not to say, however, that there isn’t still commercial investment opportunities to be had in buying a factory.

Like other commercial properties, there is the potential to enjoy the stable rental income benefits of long lease terms but you’ll have to put your investment acumen to the test in order to find opportunities, particularly in the developing boutique manufacturing market.

If you need a factory loan then you’ll need to present a strong case with the right lender about your business and investment plans.

How much can I borrow?

  • Factory commercial property: Borrow up to 80% of the property value (freehold).
  • Maximum loan term: 20 years.
  • Maximum interest only term: 5 years.
  • Loans over $5,000,000 are assessed on a case by case basis.
  • A business plan is required if you’re planning on running a business from the factory.
  • Interest only and principal & interest payments are available.
  • Low doc options are available.
  • Interest rate discounts will vary from lender to lender and the strength of your application.

Our mortgage brokers are factory loan specialists who can give you an indicative funding approval based on an initial assessment.

Call us on 1300 889 743 or fill in our free assessment form today.

Our mortgage brokers can help you qualify

Commercial loans are a little different to a typical residential home loan.

Although you’ll still need to meet standard serviceability criteria regarding your income and asset position, getting approved comes down to presenting an application that highlights your strengths as a borrower.

If you can provide plenty of evidence to support your financial situation and your investment and business plans, it will open up a world of choice in terms of lenders that can offer you a significantly reduced interest rate and even allow you to borrow at a higher Loan to Value Ratio (LVR) than normal.

Being able to save money with a competitive interest rate is really helpful no matter whether you’re setting up your business in the factory (freehold going concern) or buying the property as an investment (freehold). That extra bit of cash flow can give you more peace of mind in case things go wrong.

Discover more about how the commercial loan process works and the other types of commercial properties we can help you finance by completing our free assessment form.

How are factories valued?

Not all commercial properties are valued in the same way and they’re definitely assessed a lot differently to a residential property.

In saying that, some factories may be classed as mixed use when the bank sends out their valuer, depending on the property’s adaptability in being used for either industrial, commercial or residential purposes. In addition to this, local governments regularly review zoning based on things like gentrification so banks will also take this into consideration when they’re considering your application.

For example, a particular suburb that was once an industrial hub may, over time, change as a result of an influx of young families or professionals wanting to live in the area. In cases like this, the valuer will take into account considerations that are typical with residential properties.

The bank valuer will specialise in assessing industrial properties like factories and the main question they will be asking is whether the property has a good likelihood of attracting buyers in the event that you default on your loan and they have to sell your factory.

Location is important no matter whether you’re buying the property as an investment or using the premises to operate a business.

Generally speaking, a factory close to good infrastructure, such as highways and motorways, rail lines, shipping yards and airports, is likely to attract buyers because of the access the property will have to transportation lines.

In addition, factories located in inner-city locations or central business districts (CBDs) as opposed to those located too far outside of city limits are considered to be prime locations particularly since the growth of smaller, boutique factories over the past couple of decades.

What are specialty factories and how do banks value them?

These types of operations are specially-equipped to manufacture or process things like medicine, electronics or a types of food that require particular temperature controls or machinery.

It can be harder to secure a lessee on a property that’s designed for a specific purpose because it’s likely that the factory operates in a niche market.

The location of the property and the strength of the industry in which you or your tenants are operating has a major impact on your LVR or borrowing power.

Luckily though, we have a range of commercial lenders to choose from and each of them have different policies when it comes to assessing commercial properties. Chances are we can find the right lender for you!

How do banks assess factory loan applications?

Commercial lenders will generally require you to have at least 1.1 to 1.4 times the amount of income to proposed interest expenses. This can include a residential property that you own, which you can use as security for the commercial loan.

Coupled with a strong income and asset position, we may be able to get you qualified for a factory loan even if you have a bad credit history. Conditions apply so please speak with a specialist mortgage broker about your situation.

If you’re simply purchasing the freehold (the property and land itself), then banks will simply want to see that you can afford to pay back the loan.

For business owners looking to purchase a factory as a means of expanding their business, that is, moving your business into the factory, the bank will usually want to see:

  • Financial statements including Business Activity Statements (BAS), an Australian Taxation Office (ATO) tax portal printout or bank account statements for the last three to six months showing your turnover.
  • A business plan that details cash flow forecasts, market competition and your business model.

SWOT analysis

If you’re buying the freehold as a going concern, the bank will assess your business plan carefully, typically by means of a SWOT analysis, an acronym for Strengths, Weakness, Opportunities and Threats.

Although it works differently from lender to lender, a SWOT analysis for a factory may look something like this:

Strengths: For example, you have a substantial history of working in a factory, preferably in a managerial or corporate position, in the same industry.

Weaknesses: This refers to the weak aspects of your application such as having little to no experience in the industry and/or in running a factory operation.

Opportunities: This comes down to the industry you’re in. For example, today, there is a need for high-tech production like mining equipment, biomaterials and aerospace technology than compared to heavy industrial work.

Threats: This refers to external factors that are largely out of your control. For example, you might own or run a boutique manufacturer that makes products like furniture or jewelry. You could easily be under threat by other small factories or overseas manufacturers that decide to mass-replicate your product.

The bank wants to see that you can stay profitable and we can help you present a strong case!

Call 1300 889 743 or complete our free assessment form to speak with a factory loan specialist today.

What security can I use for a factory loan?

  • Registered first mortgage/s over security property.
  • General Security Agreement (GSA) over all of the investor’s/owner’s rights and undertakings in respect of all security property.
  • Directors’/shareholders’ guarantee.

Why is the property being sold?

When checking the classifieds for a prime piece of factory real estate, one of the first things you’ll want to do is find out why the factory is being sold in the first place.

If you’re buying a factory that already has tenants, ask the tenants to provide three years business bank statements as a minimum and go over them with your accountant. Ensure that you’re given bank statements as opposed to not profit and loss statements because the latter can be unreliable.

These statements will be able to tell you if the vendors have been operating a profitable business up until this point and if they’re planning on continuing their lease for the long term, preferably 5-10 years.

What about a factory that is untenanted?

It may be that the vendor is struggling to find tenants so ask your business broker or commercial buyers agent for vacancy rates. Low vacancy rates are great because it’s usually indicative of healthy economic conditions and lessees continuing to run profitable ventures.

High vacancy rates, on the other hand, are a major red flag that you should keep in mind. It may be that there is something wrong with the property or there’s been a change in zoning in the area.

Vendors after a quick sale may not willingly give you this information so it’s important you do your own due diligence.

The best way to find out is to actually get out to the property and look it over with the buyers agent. In addition, consider hiring a specialist property inspector who can check that the structure is to code and that the site is free of contamination, which is crucial homework if the factory was used to manufacture oil or chemical products.

The problem may not be bad enough to walk away from the deal completely and you may be able to purchase the factory at a reduced price. Again, we recommend that you seek professional advice from a qualified commercial property inspector.

What makes a good factory?

In a low interest rate environment, it may be possible to find a positively-geared property from day one.

The returns on factories (freehold) tend to be high during periods of economic downturn as result of high vacancy rates. Although it’s important to find a favourable lease, it’s supply and demand that drives capital values over the long term.

Of course, it really comes down to choosing a factory that meets the needs of your business or the tenants wanting to rent there. Usually, this requires you to have first hand experience working in that particular industry, whether that be in a mechanical workshop, textile manufacturing plant etc.

Generally speaking, you’ll want to focus on:

  • Good land space: Having plenty of open space gives you the option for more storage or to add a car park, both of which can be attractive to potential tenants. Of course, if you’re running a boutique manufacturer, you may not need all of this land.
  • Easy access for trucks and semi-trailers: This includes gates with wide access and high roller doors and send and receive stock and products, respectively.
  • Good clearance height: The so-called clear height or clear-span is the distance between the floor in the factory and the ceiling before any obstruction gets in the way like a fan, hanging lights or girders.
    Tenants need to know how much they have to work with for the purposes of storage, maneuvering forklifts and mini-cranes as well as for the installation of machinery and conveyor belts, the latter often relying on gravity to keep the assembly line moving hence the need for suitable clearance height).

  • Wide doors: Something often overlooked but essential when installing and maneuvering large machinery. Your only other option is knocking down a wall which costs money.
  • Loading dock: Factories with loading docks are highly sought after because the business owner won’t be required to create a separate dock on the inside.
  • Security: Mechanical roller doors, security fences, reinforced doors, surveillance cameras and alarm systems are highly sought after.
  • Office space: Having an office on the factory grounds can be an attractive feature for tenants but, of course, it really depends on their business needs. Toilets, a kitchen and air conditioning are also highly desirable.
    Generally speaking, about 5-10% of the total square footage is ideal for a dedicated office room. Any more and the potential tenant may consider whether they’re in fact getting enough storage space to justify the amount they’ll be spending on rent.
  • Engineering certificate: You should ask the vendor for this because it can tell you things like the load bearing capacity of the concrete slabs on the floor as well as the car park area.
    This is essential when you take into account the type of material or stock that will be delivered, moved and dispatched over the land area of the factory.

Location

Over the past 20 years, the Australian economy has transitioned from a manufacturing and agriculture hub to an economy driven by the service and mining industry. A lot of industrial manufacturing has been driven overseas, where the cost of production is low.

As a result, manufacturers have largely departed inner city areas but there is opportunity in these areas when it comes to smaller, boutique tenants like boutique clothing manufacturers.

Factories in this market tend to follow the same characteristics of residential property, with tenants looking to be near the city and its services, including transport links.

Many of the best investment opportunities are in areas that are in the process of gentrification. When areas gentrify, the local council or state government reassess zoning and make improvements to transport links. Factories that were previously zoned industrial may actually be later classed as mixed use.

Ask the local council for development plans for the area or have a look at government websites like the Department of Infrastructure and Regional Development about plans for your state.

High-tech tenants

Looking at buying a factory that specialises in electronics or high-tech production like mining equipment, medical equipment or biomaterials?

There is continuing strong demand for the products made by high-tech and specialised manufacturers. These types of properties tend to be smaller than larger commercial factories like car manufacturing plants and have features like clean rooms, temperature controls and access to high-speed to broadband.

Unlike industrial factories, the need for close proximity to freeways and freight railway is not as important as access to highly skilled labour. That means there is opportunity for these types of properties in inner and middle-ring urban areas.

Although there are benefits and it’s a trend that will continue in today’s highly-technological consumer environment, vacancy rates can be quite high and lease terms can be shorter in industries like this.

There are opportunities but you really need to do your homework on the tenants being able to run a profitable business and continue to pay their rent. A commercial accountant is essential.

Should I buy the factory freehold?

Like other types of commercial property, buying the freehold and leasing the premises out to tenants means:

  • You have control: That includes control over renovating or redeveloping the factory as you see fit and selling it at the right time to take advantage of changes in the market.
  • Fixed costs: Unlike running a business, you’re really only a slave to interest rate movements but even then you can have the security of consistent commercial loan repayments by choosing to fix your loan for a period of time.

The benefits of running a freehold going concern factory

From a business perspective, buying a factory can help companies realise their medium to long term business goals.

As the company grows, so too does the need for a larger space to manufacturer or process materials.

Unlike most warehouses though, a large component of a factory’s make up is machinery including conveyor belts, pumps, heating and cooling vats, drills, presses and robots used for assembly line production.

Although having this machinery is an ongoing cost in terms of maintenance, you have to really calculate the savings you’ll make by automating processes that you previously had to undertake manually.

On top of that, sometimes factories have warehouses on-site to house goods, manufacturing resources and machinery.

It helps to keep costs fixed when running a business because you only have to worry about one-off expenditure for this extra space.

It’s generally considered to be a more efficient option in terms of storing products before shipping, rather than going through a third-party warehouse provider. In fact, a factory that’s a little too big for your business may not be a bad thing!

You can actually generate business revenue and rental income if you rent out a portion of the factory premises to another tenant to generate additional income.

That’s one of the main benefits of owning the freehold: even if your business hits a rough patch, the property itself will usually retain value and may even generate capital growth depending on market conditions.

Although the other benefits of owning the freehold is freedom over what you can do with the site and relatively fixed costs in factory loan repayments, you have to keep in mind that you’ll pay a significant upfront cost to purchase the property, as opposed to simply signing a lease.

The other things to consider are:

  • The ongoing costs of property maintenance: You answer to no one when you own the factory, that’s true, but you’ll also be responsible for council rates and repairs to the building.
  • The barriers to growth: Being locked into a mortgage means that if your business expands, your ability to be a nimble business and find a larger property will be stifled until you either pay off your mortgage or find a buyer who is willing make a favourable offer. Of course, you could retain the freehold and rent out the entire premises while you continue your business elsewhere but it’s best to carefully consider the financial pros of cons of this option by speaking to your accountant.

What types of factories are there?

  • Discrete products: Some factories produce what are known as “discrete products” or final consumer products. However, parts or sub-assemblies may also be produced, with the final product completed elsewhere.
  • Continuous production: This can include the production of paper and cardboard, float glass and products that involve metal smelting.
  • Boutique manufacturing: These types of factories have limited automation in place because there is a bigger focus on quality rather than the quantity of production. Such products produced in these types of factories include small electronics like watches and amplifiers, instruments like specially-made guitars, small boats, furniture, clothing and ceramics.

Are there tax benefits to buying a factory?

Like other types of commercial properties, you’ll usually be charged goods and services tax (GST) when purchasing a factory.

That means when negotiating with the vendor you should allow an extra 10% on the property’s purchase price.

As an investor though, you can actually claim GST back as an input tax credit against GST charged on the property’s rent.

It’s essential you speak to an accountant before making a financial decision relating to tax benefits.

What makes a good lease?

This is where you need the help of a specialist commercial solicitor to look over the lease term for you.

Some of the main things that you’ll want the lease to have is a clear indication of who is responsible for the property’s ongoing expenses.

Normally, the tenant pays all outgoing costs including council rates, water and electricity.

They should also “make good” any physical changes to the premises. This could be for the purposes of their business but it’s important to be aware that you, as the owner, usually have the right for the factory to be returned to its original state.

Zoning for factories

Factory zoning falls under industrial zoning and the kind of work that can be undertaken in these zones varies from state to state.

Here is the industrial zoning for one state in Australia but it’s important you find out zoning requirements for the factory you’re looking at buying by checking with the local council:

  • Industrial 1 Zone: Provides for manufacturing industry, the storage and distribution of goods and associated uses in a manner that does not affect the safety and amenity of local communities.
  • Industrial 2 Zone: Very similar to ‘1 Zone’.
  • Industrial 3 Zone: Provides for industries and associated uses in specific areas where special consideration of the nature and impacts of industrial uses is required or to avoid inter industry conflict and to allow limited retailing in appropriate locations.

Speak to a financial adviser or accountant

Investing in a factory is a lot different to investing in residential property so it’s essential to seek out proper financial and legal advice first.

The great thing is that initial consultations are usually free for accountants, financial advisers and lawyers. However, even if you have to pay a few thousand dollars for these professionals, you’ll be able to avoid really common mistakes when owning and maintaining a factory business and potentially saving you thousands more over the long term.

Have you considered speaking to an accountant as well?

They can help you set up an entity structure that’s more profitable for your situation.

A trust or self-managed superannuation fund (SMSF) structure may suit your particular situation better but please speak to a financial adviser before making any decision.

Did you know that a specialist solicitor can help you ensure the Contract of Sale is favourable?

For example, if you make an agreement with the vendor that certain machinery, pumps or pressure vessels (depending on the type of factory or workshop it is) be fixed or replaced before you sign the contract, you’ll want to make sure that there is a null-and-void arrangement in the Heads of Agreement just in case the vendor fails to undertake such work.

Similarly, a business broker can negotiate with a vendor on your behalf.

Call us today

Call 1300 889 743 or complete our free assessment form to speak with a one of our specialist commercial mortgage brokers today.

We’re experts at factory loans!

  • Stephanie F

    I’m self employed and have been doing great for the past few years but I have a bad credit record which will only go away from my credit file in 2 years. I want to buy a factory so can you help me secure a factory loan?

  • Hi there, we may be able to help you secure a factory loan despite your bad credit record as long as you have a strong income and a great asset position. Please call us on 1300 889 743 or enquire online to speak with an expert specialist mortgage broker:
    https://www.homeloanexperts.com.au/free-quote/