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Retail Commercial Loan

As far as commercial properties go, retail shops are a popular investment choice but how do you get approved for a retail commercial loan?

Banks can actually be a little conservative when it comes to the retail industry because it’s usually the first sector to suffer during an economic downturn.

However, there are still good investment opportunities so getting approved for finance will be based on the business case you can put forward.


How does a retail commercial loan work?

Commercial lenders often provide more favourable terms and interest rates for “standard” retail properties that can easily be converted and refurbished for many different business purposes.

Many retail properties are zoned mixed use which is an advantage when banks are considering whether to approve your retail commercial loan.

If you’re looking to run your own business from the premises, banks will also want to see that you have experience and can back it up with a thorough business plan to keep the venture afloat.

How much can I borrow?

  • Standard commercial property: Borrow up to 80% of the property value.
  • Purpose-built commercial property: Borrow up to 60% of the property value.
  • Retail business loan: Borrow up to 50% of the business value.
  • Low doc, no doc and lease doc options available.
  • Loan term: 15 to 30 years.
  • Fixed rates: Up to 5 years.
  • Interest only: Up to 5 years.
  • Interest rate discounts vary depending on the lender and your financial situation.
  • The bank will generally require a business plan and profit forecasting for the retail shop.
  • Yearly reviews required on a case by case basis.

Which bank will approve your retail commercial loan?

Call us on 1300 889 743 or complete our online assessment form to speak with one of our specialist mortgage brokers today.

What is a purpose-built property?

The majority of retail commercial loans that banks approve are for shops like convenience stores, variety stores, beauty salons and clothing stores.

These types of commercial properties are considered standard by the banks because they can easily be stripped and sold to many potential buyers looking to run a different type of business.

A purpose-built retail property is something that’s built for a specific purpose such as butchers.

A butcher shop is equipped with coolrooms and the floors are generally built to invert towards drains.

Properties with sub-floor drainage and grease traps like those found in chicken shops are also considered purpose-built.

Banks are conservative when it comes to lending for these properties because they only appeal to a certain buyer.

Having a small market appeal is a concern in the event that you default on the retail commercial loan and the bank needs to sell the property.

How do banks value the property?

The size of the shop

Shops can be anywhere from 20-50 sqm2 or more: the space you need really depends on what you or your tenants need to run the business.

Banks aren’t particularly conservative when it comes to large or small retail premises because any one space would appeal to many different types of business niches.

However, properties in prime commercial locations will have a higher value attached to them so the larger the floor space, the more expensive the property.

Location

Retail stores located in central business districts with a good amount of foot traffic and a “tenant mix” that compliments your business (or that of your tenants’) will be looked on highly by the bank.

It’s indication to them of long-term tenancy and a wide market appeal should the property ever needs to be sold.

Zoning

In most cases, retail properties are zoned mixed use which means they are typically located in Commercial 1 Zone.

This also makes sense from a business perspective.

If you’re buying or running a convenience store, you want to be close to where people live and run their daily errands.

Although it’s rare, some retail stores may be zoned Commercial 2 Zone which are typically areas dedicated to offices, manufacturing and other factory business.

Banks can be conservative when it comes to retail businesses located in these locations because there is minimal tenant mix to promote consumer activity, particularly on weekends.

Although clothing or hobby stores may struggle to succeed, food vendors may thrive in these locations because they can tap into the 9-5 market.

The tenant

The bank will use proposed rental income when working out your ability to borrow but they first want to see that there is a good lease in place.

Generally speaking, the bank will want to see that there is 2 to 3 years left on the lease.

It may even be a condition of approval that the lease be renewed with two, three or more options before they approve your retail commercial loan.

Basically, the banks want to see that you have good long term tenants that will pay their rent on time.

What if the retail shop is vacant possession?

Although they’re rare to find in the classifieds, banks wouldn’t necessarily decline a retail commercial loan for a vacant premise.

If you’re planning to run your business from the premises, the bank will want to see that you have strong business acumen and considerable experience for the venture that you’re going to run.

How do banks assess the tenants?

The lender will want to know that the current tenants are running a profitable venture so they will keep paying their rent and you can keep making your retail commercial loan repayments.

Generally speaking, the lender may ask to see the current business financials of the tenants specifically bank and profit and loss statements for the past two years.

This is something you should be doing with an accountant that specialises in retail commercial properties.

By analysing the financials, you can quickly work out whether the vendor is just after a quick sale and you’ll be left with vacant premises in 6 months time.

Apart from the business financials and the lease remaining on the property, commercial lenders are inherently averse to certain types of business within the retail sector, particularly those considered to be past or currents fads.

One example of this is plaster painting, which was a booming trade in the 90s but not so much today.

Another example of dying industries include music and movie stores that have been disrupted for many years by the internet and swallowed up by the major industry heavyweights.

What if I'm running the business myself?

Like pubs and restaurants, retail stores can be quickly affected by poor management so if you’re planning to open up shop yourself, the bank will want to know a few things first.

Your experience

Generally, you’ll need to have at least 3-5 years experience in the same or similar industry, specifically in a managerial capacity.

Like a resume for a job, you’ll need to show how successful you were in running a store in the past.

It’s a good indication that you will stay profitable in your new venture and be able to continue making your retail commercial loan repayments.

A business plan

You’ll need to provide business plans and profit forecasting for the business you want to run.

This includes why the particular location you’ve chosen will support your business going forward and how you’ve chosen a retail niche that sets itself apart from the local competition.

Your accountant can help you put a strong business case forward.

Direct competition

Tenant mix can support healthy traffic and positive consumer environment but it can also bring with it competition.

You’ll need to show that you have strong business and marketing acumen to stay profitable in a business that operates on a low margins.

For example, if your venture has economies of scale, such as an independent supermarket, you may be able to weather the impact of direct competition.

While this is a safeguard for this type of business, you have to really consider how you’re differentiating yourself from similar businesses in the areas.

You should consider joining an industry association like the Australian Retailers Association for some more tips on running a successful retail business.

How can our brokers help you?

Home Loan Experts has a number of senior mortgage brokers that have actually worked as the decision makers in the commercial arms of a number of major banks and lenders.

They thoroughly assess your financial situation, whether you would like to buy a freehold property or a freehold going concern and then determine which to proceed with.

By asking the right questions and working with you to build a strong business case, you put yourself in a better position to get approved for a retail commercial loan.

In addition, it gives our mortgage brokers more power to negotiate a sharper commercial interest rate and allow you to borrow up to maximum limit or Loan to Value Ratio (LVR).

By getting the retail commercial loan that’s right for you, you can buy the prime-located retail shop or store that you have your heart set and start yourself on the right financial foot if you’re planning to run your own business from the premises.

We’re retail commercial loan experts so complete our free assessment form today and let us know what your commercial plans are.


Tips for buying a retail store

The retail sector covers such a large number of business types so the strategy for how to go about finding the right property is difficult.

However, there are some general rules and tips you can do to ensure you’ve done your due diligence on the property and the business you want to buy.

Do your due diligence

Check for planning at your local council

Before making the decision to buy what you consider to be a retail property that ticks all of your boxes, you should get in touch with the local council.

Find out about development plans and changes to zoning that may affect not only your ability to stay profitable, but your ability to operate.

Examples of this include the construction of a supermarket, shopping mall or a new motorway that can quickly drive away traffic and pedestrians.

There may be other crucial changes like no standing during peak hour times. Changes to zoning can be the death knell for your business.

Vendors will obviously be reluctant to tell you these facts so it’s essential you do your own due diligence and even seek out the services of business broker that understands the location you’re looking at.

Does the vendor have another tenant lined up?

If the vendor is selling the property as a vacant possession, it’s your chance to ask them to lock in a new tenant before you commit to buying the property.

Although vacant possessions are rare, it can happen, particularly in a stagnant market.

This should be a red flag, particularly if the vendor refuses to line up a new tenant before proceeding with the deal.

By proceeding with the sale, you’re in a strong position to negotiate on price but you have to really consider whether you can run a successful business in the location or whether you can find a tenant in a reasonable amount of time.

Bear in mind that it can be really expensive to lease a commercial property to a new tenant.

You generally have to give them from anywhere between 2 to 6 months free rent so they can complete the fit out and start operating.

Starting a bluechip or a new niche?

Bluechip or evergreen retail operators have a proven track record, demand, customers (including corporate customers), products on sale and existing relationships with distributors.

On paper, it makes sense to start a similar business but you also have to consider other market forces that will affect business viability going forward.

One great example of this is the internet and how it pulled people away from the face-to-face shopping experience to online.

Even major retailers that weren’t quick enough to move are still feeling the effects of this.

The internet is here to stay but it doesn’t mean there isn’t still opportunity in the physical retail world.

Hobby stores, for example, still thrive because they appeal to a particular market such as motorcycle lovers or people who love electronics.

As long as you have the skills to build strong relationships (or have existing relationships from your previous role) and considerable expertise in the service or products you’re offering, you can benefit from a market that still prefers the personal touch of a local retail store.

While a convenience store providing the basics may sound like a “safer” investment option (because people “need to eat”), you still have to differentiate yourself from the competition with a good location, a wide selection of goods, good pricing and even an added service that other stores in your location don’t offer such as refilling gas bottles.


Retail commercial loan FAQs

Not all retail properties are the same so asking the right questions will put you in a better position to make an information investment choice.

What if there is an attached residence?

If the property you’re looking at buying is a strip shop with a vacant attached residence, you can apply for another to purchase it.

The great thing about it is that the loan would be a residential home loan meaning you can borrow at a higher LVR and access residential interest rates which are cheaper than commercial rates.

Strip shops are considered mixed use by banks so you can borrow up to 75% of the property value to buy the attached residence.

You can even buy the attached residence as an investment property!

So potentially you could either be earning profit from your business or rental income from your retail tenant as well as rental income from your residential tenant.

Can I buy a retail store in a shopping centre?

If you’d like to run your business from vacant store in a shopping centre, we cannot help you get finance for this.

The reason is that in these situations, you’re actually buying space from a Westfield or Wesfarmers, for instance. You’re renting the space instead.

The bank can’t use the value of the business premises because this is already owned by the operator of the mall.

The same is true for business parks: the land itself is usually owned by a corporation which then rents out shop units.

Despite this, we may be able to help you to finance your capital requirements to set up your business if you have equity to use in an existing residential property.

Let us know what you plan to do by completing our online assessment form.

What if I want to buy a shop in an arcade?

Sometimes you’ll see vacant retail premises for sale that are located in arcades or shop fronts with a shared public parking lot.

Arcades are a little different to running a business in a shopping centre because in this situation you’re actually buying the space so the bank can use it as security.

Arcades are owned by a strata corporation so you own the shop and pay strata levies as well as all other outgoings.

A lot of older arcades with 6 to 10 shops tend to operate under a strata title.

Are banks ok with strata titles?

Although they work a little differently to a typical freehold arrangement, they’re seen as standard titles by the banks.

Do you need a retail commercial loan?

Call us on 1300 889 743 or complete our free assessment form and we can tell you if you qualify for a retail commercial loan.

  • Jeffreys

    What’s the maximum borrowing limit if I go for a no doc retail commercial loan?

  • Hi, you can generally borrow up to 65% of the property value with a no doc commercial loan. You may even qualify if you have a bad credit history, however, your application must be strong in other areas.