Commercial Property Loan Deposit: What’s Required?

By: Aaron Robbins0 comments

When venturing into the realm of commercial real estate, aspiring investors are often confronted with a myriad of financial intricacies, among which is the commercial property loan deposit. Recognising the significance of this initial down payment is paramount for navigating the world of commercial property financing.

Keep reading as we detail some key aspects of what’s required for a commercial property loan deposit.

What impacts the deposit amount on commercial property loans?

Several factors impact how much you’ll likely need to offer as a deposit for your commercial property loan. Most lenders typically require a larger deposit for a commercial loan compared to residential loans. While residential loans may have deposit requirements as low as 5% to 20%, commercial property loans generally require a deposit of 20% to 30% of the commercial property purchase price.

Here are some other factors that impact the deposit requirements on commercial loans:

Loan-to-Value Ratio (LVR)

An LVR represents the proportion of the property value the lender is willing to finance. The LVR is usually lower for commercial property loans than for residential loans. Lenders commonly offer LVRs of around 70% to 80% for commercial properties, which means you’ll need to provide a deposit of 20% to 30%.

Your exit strategy

An exit strategy plays a crucial role in determining the impact on the deposit for a commercial property loan. An exit strategy is a well-thought-out plan outlining how you intend to repay the loan at its maturity. Private lenders consider the viability of the exit strategy when assessing the loan application over credit checks or cash flow.

An effective exit strategy reduces the risk for both the borrower and the lender, which can positively influence the loan terms and deposit requirements. A robust strategy might involve selling the property, refinancing the loan, or generating sufficient cash flow to repay the debt. If the lender perceives the exit strategy as reliable and achievable, they may offer more favourable loan terms, such as a lower interest rate or a reduced deposit requirement.

Conversely, a weak or uncertain exit strategy may make the lender wary, resulting in stricter terms or a higher deposit. Lenders prioritise repayment assurance, and a lack of confidence in the exit strategy may be perceived as a higher risk.

Loan Structure

Commercial property loans often have different structures compared to residential loans. They may have shorter loan terms, typically between 10 and 15 years, and higher interest rates. Lenders may also require regular loan reviews and revaluations of the property during the loan term.

Additional costs

When purchasing a commercial property, it’s important to consider other costs involved, such as stamp duty, legal fees or valuation fees. These costs should be factored into your overall budget to ensure you can afford the deposit and associated expenses. Only some commercial loan types allow you to add additional costs into your loan amount.

What can I use a commercial property loan for?

Commercial property loans can be used for more than just purchasing standard commercial properties. Here are some of the other ways you might be able to use a commercial property loan:

Property purchase or commercial property investment

A commercial property loan can be used to finance the purchase of commercial real estate, such as office buildings, retail spaces, warehouses, or industrial properties. Buying a commercial property comes with some additional complexities to purchasing residential properties. Therefore, expect commercial lending to be more complex than lending for residential property.

Renovation or expansion

Businesses may utilise commercial property loans to renovate or expand their existing commercial properties. This can involve remodelling interiors, adding new floors or sections, upgrading infrastructure or improving the overall functionality and appearance of the property.

Refinancing

A business may be able to refinance an existing commercial property loan to take advantage of better interest rates or terms. This can help lower monthly payments, extend the loan term, or access additional funds for other business needs. However, due diligence must be taken to ensure you’re aware of any consequences or impacts of refinancing, such as early repayment fees or break costs.

Leasehold improvement

When leasing a commercial space, businesses may negotiate leasehold improvement agreements with landlords to make modifications or enhancements to the property. A commercial property loan can cover the costs associated with these improvements.

Debt Consolidation

If a business has multiple loans or debts related to commercial properties, they might be able to use a commercial property loan to consolidate these debts into a single commercial loan, which could simplify their repayments and potentially reduce interest costs. Similar to refinancing, though, it’s important to check the loan contract on any business loan, home loan or commercial loan before refinancing to understand the implications of paying it out before the maturity date.

What happens if I don’t have the required cash reserves to make my deposit?

Major banks are usually very strict regarding their lending criteria and may offer you little flexibility regarding your commercial property loan deposit. However, there are some options if you don’t believe you have the cash reserves to meet your deposit requirements:

Provide additional security

If you have insufficient cash or collateral to offer, some commercial lenders may approve your application, provided you can offer additional security. Some of your options may include using a guarantor loan, leveraging business assets or, if you have sufficient equity, using other properties as collateral to support your loan. In some cases, you may be able to use the equity in either a residential or commercial property.

Consider private lenders

Private lenders are non-bank lenders who can provide business owners and property developers with the flexibility they often need to secure business loans, including commercial property loans. Private lenders can also approve a business or commercial loan much more efficiently than traditional financiers or big banks, with less documentation.

Discuss your deposit requirement for a commercial loan with Diverse Funding Solutions

Considering commercial lending for a property but not sure if you’re able to meet the deposit requirements? Diverse Funding Solutions is one of Australia’s fastest-growing private finance brokers. We have access to over 200 of Australia’s top private lenders, meaning that we can help you compare loan options and commercial property interest rates.

Let us align you with a private lender who can meet your needs — Contact the team today to find out how!

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