Starting Out Small: Securing a Loan for a Business and Commercial Property.
Opening up shop, working with people, being your own boss, and making a profit – it’s a lifelong dream for many of us, and for some people, it becomes reality and setting up shop is the first step. Securing a loan for a commercial property is a different process than securing a home loan, and if you are thinking about making this step, let’s have a quick look at what you can expect.
Buying the Business
When buying an existing business and its property it is crucial to do all the right evaluations and crunch the right numbers before heading to the bank, having an accountant on hand can be vital at this stage of the process. The first thing you have to do is check the businesses operating performance, this means doing a business valuation which evaluates EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), this is a great way to see how profitable a business is/can be.
The next step is deciding on how much involvement you will have with the business, and that’s where you have to ask yourself a few questions (the banks will be asking these as well):
- Will this be your primary or additional source of income?
- Are you experienced in this line of business, with the financials and plans to back it up?
- What are your projections and forecasts for the business? Do you have a concise plan on how to maintain and grow the business for a profit?
- What are your assets and liabilities?
Commercial Property
A commercial property can be easily defined as a place where your will/does operate from and can be purchased with tenants with leases, or for your own start-up. Commercial property can look like a handful of different things, for example:
- Offices spaces, office buildings.
- Light industrial units, warehouses, and showrooms.
- Heavy industrial premises.
- Retail premises.
- Development projects (e.g.: retirement complexes, hotels, tourism)
A commercial property will be across a shorter term than most property loans, commonly between 10 – 15 years. The deposit for a commercial property is around 40%-45%, and on top of this, commercial interest rates will also apply. Banks and lenders will assess interest rates depending on how risky the deal is: the lower the risk, the lower the interest rate is. The bank will assess the strength of the business and your history, assets, and security.
The building will also need to be assessed and meet all required standard as banks and lenders require that commercial property security must comply with all relevant building codes and the Resource Management Act.
Securing a Loan
There are many ways to secure a loan at different rates, depending on what assets you have, and how secure and viable the business is. A common form is borrowing on an existing property such as a house as this makes the loan less risky for the banks, which can result in a lower interest rate. Unlike getting a mortgage for a house, the bank will require a lot of information to assess how risky the investment is, this will be based on your previous borrowing history, any current debt, and the business plan.
When establishing a business it is crucial to have a good team behind you to add security and sense of mind to your investment so you can concentrate on making the business profitable. This includes having a broker help you best present yourself and secure a good rate, having accountants and tax professionals to keep the business afloat and having the right insurance to protect yourself and your investment from the unforeseen. At PFSL, you will find Taz Professionals and Accountants, Mortgage Brokers and Insurance Broker under one roof.
Buying or starting a business is a brave and terrifying move, but can pay off financially and can be personally rewarding as well, so make sure you take the right steps in building your dream so it can grow and prosper, rather than deflate.