Refinancing a commercial property loan: what you need to know

By: Aaron Robbins0 comments

With the ever-shifting commercial property landscape, commercial property owners commonly look to refinance their commercial property loan at one point or another. While refinancing can be a strategic financial move for businesses looking to potentially improve cash flow or access additional capital for expansion, there are several considerations that need to be made before submitting a refinance application.

Here’s what you need to know about refinancing a commercial property loan.

When to refinance a commercial loan?

There may be several factors that have led you to consider refinancing a commercial property loan. For many business owners, they look to refinance commercial property loans in common instances:

1) Their commercial/business loan is coming off a fixed interest rate

Most commercial loans are only on a fixed-rate for a set duration, like most other fixed-rate loan products. Many consider refinancing to feel confident that they are getting the best rate on their commercial loan. Particularly in a rising interest rate environment, it makes sense why a business owner would be looking to ensure get a better deal, or ensure that they have competitive terms and a competitive rate on their commercial loan.

2) Rise in property value

If the commercial property owned has experienced a significant rise in value since first taking out the loan, a refinance can potentially be viable if the raised value provides access to better terms, or provides the opportunity to unlock equity tied up in the property. By leveraging the equity in their property, borrowers may be able to tap into increased liquidity to fund expansion, renovations, or other strategic initiatives.

Private lenders are often more willing to consider lending against the equity value of the property, making it an attractive option for businesses seeking capital for growth opportunities or to strengthen their financial position.

3) Interest rates drop

A drop in interest rates is another common timepoint when business owners opt to refinance their commercial property loans.

4) Change in business or financial circumstances

Refinancing may be an option if your financial situation has changed, and you need to adjust your loan terms to accommodate unexpected events or business fluctuations.

What can I use a commercial loan refinance for?

As we touched on above, there are several reasons why loan holders seek to refinance their commercial property loans:

Access to equity

Tapping into the equity within the value of a commercial property can potentially open the door for many business opportunities. Refinancing potentially provides business owners with additional funds to expand their operations, renovate their existing business premises, or acquire a new property.

Improving cash flow is another common use for refinancing. Cash flow is undeniably vital for businesses of all scale and size — a refinance on a business’ commercial property loan could potentially free up much needed cash flow to redeploy to other areas of the organisation, or keep the business rolling through off-seasons or heighted market volatility.

Debt consolidation

Refinancing a commercial property loan may be a powerful tool for business owners to consolidate debt and potentially improve financial stability. By refinancing, entrepreneurs may be able to combine high-interest debts, such as credit cards or short-term loans, into a single, more manageable loan with a lower interest rate. The lowered monthly mortgage repayments may then free up finance pressures to help reinvest back into the business.

Additionally, debt consolidation has the potential to simplify accounting and streamline debt management, making it potentially easier for business owners to focus on core operations and growth strategies.

What to consider before refinancing commercial loans

Just as is true for any major financial decision, considerations need to be made before you apply to refinance your commercial property loan.

Costs and fees

Refinancing a commercial property loan involves various costs and fees, including application fees, appraisal or valuation fees, legal fees, and closing costs. These expenses may be significant and may offset some of the potential benefits of the refinance.

Prepayment penalties

Some existing commercial property loans are subject to with prepayment penalties, which are fees charged by lenders if you pay off the loan early. Refinancing before the prepayment penalty period is over could result in additional expenses.

Lengthened loan term

While refinancing can lead to lower monthly payments, it may also extend the overall loan term. If the goal is to pay off the property quickly, refinancing could delay that objective and increase the total interest paid over the life of the loan.

Changes in market conditions

Interest rates fluctuate, and they may not always be lower when you decide to refinance. If interest rates have increased since you obtained the original loan, refinancing might not be as advantageous as expected.

Loss of equity

If the commercial property’s value has decreased or if you take out additional cash when refinancing, it could lead to a reduction in equity. This may have implications for future financing options or the property’s overall financial health.

Is it best to use a broker to refinance commercial property loans?

Refinancing is synonymous with ‘finding a better deal’, however, the groundwork required to assess your options and find a suitable lender with the loan terms and conditions you’re seeking can take up value time away from your business. Finance brokers are adept at sourcing suitable lending solutions from a range of lenders.

Further, private funding brokers have the added advantage of accessing a range of private lenders in Australia, who can potentially offer better flexibility in terms of lending criteria, more favourable terms, and negate the need for a credit check. Diverse Funding Solutions is proudly one of Australia’s leading private finance broking firms, with access to over 200 of Australia’s top private lenders.

Our established relationship within our network of private lenders and our extensive market knowledge underpin the strength of our reputation in commercial lending. If you’re looking for a streamlined application process, low documentation requirements, and fast funding, contact the team at Diverse Funding Solutions for your commercial loan refinancing needs.

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