You have found a warehouse, office, workshop or commercial unit that suits your business.
The next question is usually:
How much deposit will I actually need?
The frustrating answer is that there is no single percentage that applies to every commercial property loan.
For many straightforward owner-occupied commercial properties, a lender may consider funding somewhere between 65% and 70% of the property value. In stronger circumstances, some lenders may consider a higher percentage.
That means a business purchasing a $1 million property might need to contribute between $300,000 and $350,000, plus purchasing costs.
But the deposit is only part of the story.
What affects the amount a lender will provide?
Commercial lenders usually look at four main areas.
1. The type of property
A standard warehouse, office or showroom in a well-established commercial area is generally easier to finance than a highly specialised property.
Properties that may receive more conservative treatment include:
- hospitality premises
- service stations
- childcare centres
- short-stay accommodation
- regional properties
- properties with unusual zoning
- purpose-built facilities with limited alternative uses
The harder the property may be to sell, the more equity the lender is likely to want from you.
2. Whether your business will occupy the property
Lenders often view an owner-occupied commercial property differently from a property purchased purely as an investment.
When your established business will trade from the premises, the lender can assess both the property and the business that will be making the repayments.
That does not automatically mean a smaller deposit, but it may open additional lending options.
3. Your business cash flow
A strong deposit does not make up for a business that cannot demonstrate repayment capacity.
The lender will generally want to understand:
- business turnover
- trading profit
- existing business debts
- personal commitments
- recent tax obligations
- how the proposed loan repayments will be met
Some lenders require full financial statements and tax returns. Others may consider recent BAS, business bank statements or an accountant-supported income position.
The right option depends on the quality of the overall deal.
4. The valuation
Commercial property lending is generally based on the lower of the purchase price or the lender’s valuation.
For example, you might agree to pay $1 million, but the bank valuation comes back at $950,000.
If the lender offers 70% of the valuation, the maximum loan would be $665,000, not $700,000.
You would then need to cover the difference as well as the normal purchasing costs.
Do not forget the costs
Your contribution may also need to cover:
- transfer duty
- valuation fees
- legal costs
- lender fees
- settlement costs
- GST, depending on the transaction
- any immediate renovations or fit-out
- working capital once the business moves
This is where many buyers come unstuck.
They calculate the deposit but forget that purchasing the property can use up most of their available cash.
There is little value in buying the perfect premises if the transaction leaves the business without enough working capital to operate properly.
Can property equity be used instead of cash?
Potentially.
Some business owners use equity in another property to help fund the purchase or provide additional security.
That may reduce the amount of cash required at settlement, but it also increases the amount of property exposed to the business debt.
It needs to be structured carefully.
The cheapest-looking structure is not always the best structure if it ties up every property you own and makes future borrowing difficult.
Can a lender provide more than 70%?
Sometimes.
Certain lenders may consider a higher loan-to-value ratio for a strong owner-occupied transaction, particularly where:
- the property is considered standard commercial security
- the business has strong cash flow
- the applicants have a good credit history
- there is clear evidence of repayment capacity
- the overall exposure is within the lender’s preferred range
Specialist or non-bank lenders may also offer higher leverage, but the interest rate and fees can be higher.
The question should not simply be, “Who will lend me the most?”
The better question is:
What structure gives my business enough funding without placing unnecessary pressure on its cash flow?
Certain lenders will do “lease doc” transactions for investment transactions where the purchase is looked at on a stand alone basis.
A practical example
A business wants to buy an industrial unit for $800,000.
A lender agrees to provide 70% of the purchase price.
Proposed loan: $560,000
Purchase contribution: $240,000
The buyer must then allow for purchasing costs, valuation expenses, lender fees and any fit-out required.
The true cash contribution could therefore be substantially more than the initial $240,000 deposit.
This is why the funding structure should be reviewed before signing an unconditional contract.
The bottom line
For many WA commercial property purchases, allowing for a contribution of around 30% plus costs is a reasonable starting point.
However, the actual requirement may be higher or lower depending on the property, the strength of the business, the lender and the proposed loan structure.
I spent many years assessing commercial lending applications from inside the banking system, as well as outside it.
My role now is to work out where your transaction fits, what the likely issues will be and how the application should be presented before it reaches a lender.
Considering buying premises for your business or to invest?
Book a commercial property finance review with Shaun Lawson from Your Business Loan Guy.
Your circumstances, lending requirements and available options should be reviewed before entering into a transaction. This information is general in nature and does not constitute financial, legal, taxation or credit advice.