Quick summary:
Commercial loans are used for business or investment purposes and are assessed differently from home loans. Lenders consider business performance, cash flow, security and experience, not just income and deposit. Loan structures vary widely, and the right option depends on your strategy, risk tolerance and long-term plans.
Whether you are purchasing a commercial property, investing in new equipment, refinancing business debt or preparing for your next stage of growth, the right finance structure can make a significant difference.
Commercial lending can be more complex than arranging a standard home loan. Different lenders may assess the same business, property or proposal in very different ways, and the lowest advertised interest rate will not necessarily provide the most suitable overall solution.
Understanding how commercial loans work and what lenders are looking for can help you approach your next business move with a clearer strategy.
Key takeaways
- Commercial loans are designed for business or investment use, not personal residential purposes
- Lenders assess business performance, cash flow and security, not just personal income
- Loan structures, terms and requirements vary significantly between lenders
- Deposits are typically higher than residential loans, but depend on the full proposal
- Alternative documentation options may be available for some borrowers
- The right structure should support both current needs and future growth
What is a commercial loan?
A commercial loan is finance used primarily for business or investment purposes rather than personal residential use.
Commercial finance may be used to:
- purchase an office, warehouse, shopfront or industrial property
- purchase a business
- fund a property development or commercial construction project
- refinance existing business or commercial debt
- purchase equipment or business vehicles
- provide working capital
- access equity to support expansion
- restructure debt to improve cash flow.
Unlike most residential home loans, commercial loans do not always follow a standard assessment model. The lender may consider the purpose of the loan, the type of property or asset being financed, the strength of the business, available security and the experience of the borrower.
How are commercial loans different from home loans?
A residential home loan is usually assessed primarily around the applicant’s income, expenses, deposit, credit history and the value of the residential property.
Commercial lending can involve a broader and more detailed assessment.
Depending on the proposal, a lender may consider:
- business turnover and profitability
- historical and projected cash flow
- the borrower’s industry and experience
- the commercial property being purchased
- lease terms and tenant quality
- existing business and personal liabilities
- the proposed use of the funds
- the security available
- the borrower’s contribution or equity
- the longer-term exit strategy.
Commercial loans may also have shorter loan terms, different repayment requirements, lower maximum loan-to-value ratios and higher fees than standard residential loans.
This is why commercial finance needs to be considered as a complete structure, not simply compared by interest rate.
What types of commercial finance are available?
The right loan structure will depend on what you are financing and what the business needs to achieve.
Commercial property loans
These loans can be used to purchase owner-occupied or investment commercial property, including offices, retail premises, warehouses, factories and some mixed-use properties.
The lender’s assessment may depend on whether the business will occupy the property, whether it is being purchased as an investment and how specialised the property is.
Business acquisition finance
Commercial funding may be available to help purchase an existing business.
The lender may assess the financial performance of the business, the buyer’s industry experience, the value of the business assets and the amount the buyer is contributing.
Equipment and vehicle finance
Equipment finance can help businesses purchase vehicles, machinery, technology and other income-producing assets without using all their available cash.
The financed asset may provide some or all of the security for the loan.
Working-capital finance
A business may use an overdraft, line of credit or other working-capital facility to help manage short-term cash-flow requirements.
This may be helpful when a business experiences seasonal revenue, delayed customer payments or a temporary gap between expenses and income.
Development and construction finance
Development finance may be required for commercial construction, property development or larger renovation projects.
These loans usually involve more detailed feasibility assessments, valuations, costings, progress payments and lender oversight than a standard property loan.
Commercial refinancing
An existing commercial loan can sometimes be refinanced to:
- obtain more suitable terms
- restructure repayments
- access equity
- consolidate debt
- release security
- fund another business opportunity
- improve short-term cash flow.
A refinance should be considered carefully because exit fees, establishment costs, valuations and other charges may affect whether changing lenders produces a meaningful benefit.
What do lenders assess?
Commercial lending policies can vary considerably, but most lenders will want to understand three main areas:
1. The borrower
The lender may examine the borrower’s business experience, credit history, income position, existing debts and ability to manage the proposed commitment.
For business owners, the lender may also assess personal and business finances together, particularly when personal property is offered as security.
2. The business or investment
The lender will want to understand how the loan will be repaid.
This could involve reviewing:
- profit and loss statements;
- balance sheets;
- business and personal tax returns;
- business activity statements;
- bank statements;
- cash-flow forecasts;
- lease agreements;
- business plans;
- contracts or evidence of future revenue.
The exact documents required will depend on the lender, loan purpose and complexity of the proposal.
3. The security
Security could include:
- the commercial property being purchased
- another commercial property
- residential property
- business assets
- equipment
- a combination of assets.
The type and quality of the security may affect the amount available, interest rate, loan term and conditions imposed by the lender.
How much deposit is required?
Commercial property loans often require a larger contribution than residential home loans.
The amount required will depend on factors including:
- the type of property
- whether it is owner-occupied or an investment
- the strength of the business
- the borrower’s experience
- lease arrangements
- location
- alternative security
- lender policy.
A standard office or warehouse in an established location may be treated differently from a highly specialised property that could be more difficult to sell or lease.
Rather than assuming a fixed deposit percentage, it is useful to have the complete proposal assessed before committing to a purchase.
Can you obtain commercial finance without two years of financial statements?
In some circumstances, yes.
Some specialist lenders offer low-documentation or alternative-documentation commercial loans for borrowers who cannot provide the documentation normally requested by a major bank.
Depending on the lender, alternative verification may include:
- business activity statements
- business bank statements
- an accountant’s declaration
- evidence of rental income
- asset and liability statements
- other evidence supporting the borrower’s capacity to repay the loan.
These options can be useful for recently self-employed applicants or businesses whose latest financial statements do not reflect their current trading position.
However, alternative-documentation loans may have different interest rates, fees, loan-to-value limits and conditions. They should be assessed as part of the wider strategy rather than viewed as a shortcut around normal lending requirements.
Can residential property be used as security?
Some lenders may allow residential property to be used as security for business or commercial borrowing.
Doing this could improve the available lending terms or reduce the cash contribution required, but it also introduces additional risk. If a family home or residential investment property secures business debt, that property may be exposed if the business cannot meet its commitments.
Before using residential equity, borrowers should understand:
- which properties secure each loan
- whether loans are cross-collateralised
- how the structure affects future borrowing
- what would be required to release the property
- the personal consequences if the business experiences financial difficulty.
The ability to obtain a loan does not automatically mean the proposed security structure is appropriate.
Can commercial property be purchased as an investment?
Commercial property can be purchased purely as an investment, with rental income used to support the lending proposal.
Possible benefits can include longer lease arrangements and attractive rental yields, depending on the property and market.
However, commercial property also presents different risks from residential investing.
Vacancies may last longer, tenant demand can be more specialised and the property’s value may be influenced by lease conditions, tenant quality and the broader business environment.
The lender may closely consider:
- the length of the lease
- rent-review arrangements
- remaining lease term
- tenant strength
- property use
- vacancy risk
- location
- whether the property could be readily leased to another tenant.
The loan should be structured with the possibility of vacancy, maintenance costs and changing interest rates in mind.
What loan structure should you choose?
Commercial finance may be available through:
- principal-and-interest term loans
- interest-only loans
- lines of credit
- overdrafts
- equipment-finance facilities
- development loans
- loans with balloon or residual payments
- fixed or variable facilities.
The most appropriate structure depends on the purpose of the finance, expected cash flow, tax and accounting considerations, future plans and the borrower’s tolerance for risk.
A structure that minimises repayments today may not always provide the greatest flexibility later. Similarly, using all available security to secure one transaction could make the next stage of growth more difficult.
Commercial borrowing should therefore be considered alongside the business’s medium- and long-term plans.
How can you prepare for a commercial-loan application?
Before approaching a lender, it helps to have a clear and well-supported proposal.
Consider preparing:
- current business financial statements
- recent tax returns and business activity statements
- business bank statements
- a summary of current debts
- details of available security
- a clear explanation of the loan purpose
- property or asset details
- contracts, leases or purchase agreements
- financial forecasts where relevant
- information about your experience and business background
- a realistic contribution and cash buffer.
It is also important to consider what happens after settlement.
Will the business retain sufficient working capital? Are repayments manageable if rates rise or income temporarily falls? Does the loan structure leave enough flexibility for the next business decision?
Why lender choice matters in commercial finance
Major banks, non-bank lenders and specialist commercial lenders can have very different appetites.
One lender may be comfortable with a particular property, industry or income structure while another may decline the same proposal.
The most suitable lender may depend on:
- the strength of the business financials
- available documentation
- property type
- loan size
- required settlement timeframe
- security
- industry
- proposed loan term
- whether flexibility or price is the higher priority.
This makes it important to understand lender policy before lodging applications. Multiple poorly targeted applications can waste time and create unnecessary complications.
The importance of looking at the whole picture
Business and personal finances are not always completely separate.
A commercial lending decision may affect:
- the family home
- residential investment properties
- personal borrowing capacity
- future property purchases
- business cash flow
- asset-protection considerations
- the ability to access equity later.
Working with someone who understands both residential and commercial lending can help identify how one decision may affect the other.
The objective should not simply be to secure finance. It should be to establish a structure that supports the immediate transaction without unnecessarily restricting future options.
Speak to Base Home Loans about commercial finance
Base Home Loans helps business owners, property investors and developers explore commercial lending options through major banks and specialist lenders.
Daniel takes the time to understand the purpose of the finance, the strength of the business, available security and the borrower’s wider goals before considering possible structures.
Whether you are purchasing your first commercial property, refinancing an existing facility, investing in business equipment or preparing for growth, it can be helpful to assess the lending strategy before committing to a transaction.
Base Home Loans is based in Perth and can assist eligible clients with commercial-finance enquiries across Australia.
Planning your next business move? Book a commercial finance strategy call with Daniel to discuss your position and available options.
This article contains general information only and does not constitute personal financial, legal, accounting or tax advice. Lending criteria, fees, rates and conditions vary between lenders and are subject to change. Consider obtaining independent professional advice relevant to your circumstances.
