Commercial Property Loan Calculator – 5 Things You Need to Know

If you’re looking for a commercial property loan calculator you might be disappointed to find that while a calculator will work out the repayments on a borrowed amount, there can be a lot more involved in getting a commercial loan than just working out what the repayments will be.   And this can work in your favour if you understand what a lender is looking for in your loan application. To start with, most lenders will lend a maximum of 70% on commercial property, but even this is subject to variation depending on the details of the property and of your circumstances.

Loans for Commercial Property Versus Residential Property

Purchasing commercial property can be quite different to buying residential property.  For one thing, there is huge variation in commercial properties – everything from a local corner store to a whole shopping centre, from a small warehouse to an enormous manufacturing complex, from a block of 5 units to a sky scraping city apartment building!  So while doing a valuation of a residential property involves looking at the size of the block, size and condition of the building and comparing it with similar sold properties in the area, with a commercial valuation the visit can take hours and include all sorts of different land use from car parks and warehousing to factories and apartment buildings.  It can also be difficult to find recent sales of similar properties in the local area, so getting a valuation for a commercial property tends to be less clear cut than residential properties.

Commercial Property Valuation
             Valuing commercial property can be challenging when there are no similar properties in the area!

 

With the huge volume of residential lending, lenders have been able to get quite specific with their policies about what properties they will lend against and what evidence they require to assess the application.  Commercial loans, on the other hand, involve much less technology in their submission and assessment, and more involvement of individual assessors in understanding the applicants and the property involved.

To start our posts on commercial lending let’s look at ‘The Five C’s of Credit’.  This will give you a good introduction into how the lenders will look at your commercial loan application, and what factors can make it more successful.

1. Character

Lenders are looking for evidence of stability.  Things that show them you are reliable.  So they look at your history to assess your future.  This includes consideration of how long you have lived at your current address, how long you have been with the same employer or in your industry, whether you have a history of paying all your bills on time, and what reputation you have.  Reputation can be particularly important when looking at big loans.  For example, a building company that is renowned for being slow to pay their bills is going to be less attractive to a lender than one who always pays their bills on time.

If you are borrowing money for a business they will want to know how much experience you have in your own business and in the industry. By understanding these aspects the lender can assess how likely you are to succeed in your business and work out what risk there is to the money they lend you.

2. Capacity

This is looking at your other debts and expenses so they can work out whether you will be able to pay the loan repayments.  They look at how much money you earn against how much money you owe to see if there are funds left over to pay the repayments on this new loan.

They can also look at potential income so, for example, maybe you want a loan to refurbish and expand your manufacturing business because you have a new contract to supply a large number of products over the next 5 years.  Even though the contract hasn’t started yet, so it isn’t showing up in your business financials, the signed contract can be included in the application as future income and that can assist the lender with approving the loan.

3. Capital

How much are you worth?  They will take the value of your assets, including real estate, vehicles, shares, cash and any other investments, minus your liabilities.  The more capital you have, the happier they are because this means you have options if there is a problem with this property.  Such as if you suddenly have a long term vacancy in this property you may be able to use your other assets to maintain payment of the loan repayments.  This is looking at whether you have a back up plan available or if giving you this loan leaves you potentially exposed.  If you’re exposed, the lender is exposed, and higher risk is what they want to avoid.

4. Collateral

This is consideration of any assets you have that the lender has a right to take ownership of and use to pay the debt if you cannot make the loan repayments.  So they are looking at the type of security that you are offering to secure the loan, and it’s ‘saleability’.  In particular they will be interested in whether the premises can be used for other types of businesses, which makes it easier to sell because it is appealing to a wider range of buyers.  So, for example, a warehouse with office space has a great range of potential buyers while a service station can only be sold to someone who wants a service station. So the warehouse is much more ‘saleable’ than the service station and any lender would much prefer it as the security for a loan.

Commercial Property Loans
                                        Some commercial properties are easier to sell than others.

5. Conditions

This is the one you have the least control over because it relates to the bigger picture of economic conditions.  So the lender can look at the local economy and the financial health of the industry that you are in as well as the local market and your competition.  They will also be looking at whether the premises will be an investment property or owner occupied, because if it is owner occupied they can look at your business financials to assess whether this is feasible, while as an investment it relies on getting a suitable tenant.

Assessing Your Commercial Loan Application

Every lending assessment in the business/commercial field is individual and is assessed differently. Some lenders develop their own ‘scorecards’ that they use for assessing the 5 C’s.  The result of this is that while a residential loan that doesn’t meet the lender’s stated policy will be declined, with a commercial loan the lender is looking at the total picture so while the application might not fit easily into their policy, if the overall deal is good they may still approve the loan.

Telling Your Story!

A big part of commercial lending is how the application is presented and rather than simply stating the figures, needs an explanation to go with it that explains the strengths and weaknesses in the application.   The weaknesses need to be mitigated, and the application needs to demonstrate whether strengths in some areas are enough to offset any weaknesses.

I like to think of commercial loan applications as being more ‘creative’ than residential applications.  The loan application needs to tell a story for the lender of why they would want to approve your loan and this requires an understanding of the loan applicants and their business.  Commercial applications can take longer to put together than residential ones but that is an important part of the process to ensure a full understanding of the factors involved and the best possible ‘picture’ to be given to the lender!

 

Commercial Loans
                                           Applying for a commercial loan is all about telling your story effectively!

 

Questions and Comments?

If you are considering a commercial purchase or would like a review of your current commercial loan (s) please get in touch via our Enquiry Form.  We can look at what you want to achieve, gather the details to paint that ‘picture’ in the application and find the best lender to meet your needs.

Have you had a commercial loan before? Have you considered purchasing commercial property or are you more comfortable with residential property? Do you have any questions about commercial lending? Please share your experiences so everyone can learn from them.

Happy borrowing!

Rachel

6 Replies to “Commercial Property Loan Calculator – 5 Things You Need to Know

  1. Great post! You are very knowledgeable. I would like to get into real estate more, for I have bought my first property already. Down the line, I will be looking into commercial real estate for a business I will be opening up in the future. This post described a lot out about the lending process, and I am looking forward to referencing your site when that time comes. 🙂

    1. Hi Jo Jo,

      Congratulations on buying your first property! That’s usually the hardest one because it seems like such a challenge to get the funds and paperwork together so the next one should be much easier.

      As I’ve said above, commercial property can be quite different to purchasing residential property but if you consider the ‘5 C’s of Credit’ you will be able to plan ahead and put yourself in a great position to make your purchase. Include your projections for your business, particularly if it will be a new business, and start thinking now about how you can demonstrate experience in the industry. If you are currently in a job in the same industry, maybe you can undertake training in something that will be useful in your business and get experience in it now, like stock ordering, staff management, finance, business planning, etc. Just being aware that a lender will look at these things will mean that if opportunities present themselves at work you’ll know which ones are best for you to undertake as part of moving into your own business.

      All the best with your future business!

      Happy borrowing!

      Rachel

  2. This is giving a lot of useful information in a single post. Great job, Mr. Jo Jo. I understood so many things here.

    1. Hi Harish,

      Thanks for visiting and commenting on my post.
      I’m glad you found it useful. I’ll be writing more about Commercial Property loans so keep in touch, and let me know if you have any questions at all!
      Happy borrowing!
      Rachel

  3. I am a residential property investor based in Brisbane and looking at commercial property for the first time as I have read about some big advantages. What are the best sites to look at when researching property and how do you go about sourcing a good property?. I feel that it is important to first know what sort of properties that 30% deposit will get me before I proceed. I already have a trust and company set up but now looking at this next step.

    1. Hi Keldyn,

      Thanks for your comment and questions. You can find real estate agents who specialise in commercial property by searching the web for the area that you want to invest in. You’ll find plenty of options in Brisbane but you might like to start on the big sites such as http://www.realcommercial.com.au or http://www.commercialrealestate.com.au to get an overall ‘feel’ for the properties that are available and then narrow it down to a couple of specific properties or agents to start with.

      Sourcing a good property takes research. You need to understand what you’re looking for in a property, such as do you want cash flow positive or good growth in value, do you want to improve or renovate the property to increase value or just ‘let and forget’ and how much are you looking to spend (commercial can range from a couple of hundred thousand dollars up to milions of dollars and knowing your budget will focus your research. You need to get an understanding of the market in the area you want to invest and you can do this by driving around and looking at the vacancies, talking to real estate agents and business owners.

      You then need to look at how the figures stack up for individual properties to see whether they match your goals. I’ll put together a post covering some of the financial side of things – it’s more detailed than I can fit in this answer!

      Happy borrowing!

      Rachel

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