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Commercial Loans – Commercial Lending
We evaluate every commercial product to ensure the most efficient structure for you. Every single commercial product at iChoice will be evaluated by our principal, Jason Khoury (a former business banker with four major banks), to ensure it’s structured efficiently. So many get it wrong and end up with poor lending structures. Flexibility is paramount and sometimes not having your lending arrangements subject to annual reviews can literally make all the difference.Whether you seek development funding, want to borrow against your franchise, your debtors book or simply against commercial property, its smart to know what options are available prior to making any decision. Most business loans are very expensive and poorly structured.It’s quite normal for iChoice to refinance business and commercial facilities that save clients tens of thousands every year.
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Lending against a commercial property, whether it is to purchase a property or for another purpose, is generally a little more expensive due to the perceived higher risk of the commercial property market. The standard LVR of 80% for residentially secured loans is also reduced, to 75% or 70%. The differential between LVR’s and rates amongst the banks are huge.Often, there is still a premium to be paid due to the commercial nature of the security property offered, and the term of the facility may need to be shorter, for example 15 years instead of 30. This can be a hurdle as a borrower would need to evidence adequate ongoing income the payout the loan in a shorter time frame. Sometimes, we need to seek a funder who will allow a 25-year term.There are some lenders now in the sub-$5M space whose rates are just about the same as home loans, especially for fixed rate loans. Some of the smaller banks offer extremely generous deals for lending against non-specialised properties such as warehouses, office space, industrial property or retail space.When it comes to specialised properties such as childcare centres, petrol stations shopping centres and hotels it’s normally the big banks that are best equipped to lend against these properties. Nevertheless, certain banks are far better than others for certain types of lending and borrowers are advised to understand the differences.The larger banks often provide finance which is subject to annual reviews and covenants that must be adhered to, which are great to avoid if you can.What most do not know, is that there are 1 or 2 lenders who will consider extending discounted home loans against commercially-zoned properties, such as shop-top housing. Whilst the LVR is slightly reduced, it’s a much cheaper outcome and must be explored. It’s a shame that hardly anyone knows that this is available, although we do enjoy the look on our clients faces when we advise them.
Due to the perceived lower risk of the residential property market, banks will often lend at cheaper rates when a residential security is offered.Unknown to many is the fact that there are 4 lenders who do not really care if the credit you seek is for a personal, investment or indeed business purpose. These banks do not differentiate between a normal home loan and a business loan as long as residential security is offered, meaning generous terms and discounted rates. This is quite fascinating.Most borrowers who have gone straight to their bank without seeking the advice of a lending specialist may end unnecessarily paying establishment fees, monthly fees and a higher rate than they need to, under stricter terms. A 2% differential on a $2M loan is $40,000 per annum!
Overdrafts are often used by businesses to manage their short-term working capital needs. They’re normally offered subject to annual reviews or even more regular reporting. Banks love to provide them because of the higher rates and line fees they can generate. Clients with a residentially-secured overdraft have generally been poorly advised. There are better ways, like trading from a residentially-secured business offset account.
Some lenders specialise in lending to certain pre-approved franchises. Borrowers buying well-branded franchises like an Australia Post, KFC or Michelle’s Patisserie can get loans secured by the ‘business-value’, often up to 60% of the value/ Purchase Price. The banks’ appetite for certain franchises change all the time.
Debtor Finance (or Invoice Discounting) is very popular in the UK and getting there, here in Australia. Banks can provide a business with an overdraft, the limit of which constantly changes to reflect 80% of what is owed to you. Hence there are regular reporting requirements.Debtor Finance (or Invoice Discounting) is very popular in the UK and getting there, here in Australia. Banks can provide a business with an overdraft, the limit of which constantly changes to reflect 80% of what is owed to you. Hence there are regular reporting requirements.Debtor Finance is a great was for expanding businesses to meet the increased working capital requirements that growth requires. It’s normally a facility considered by growing businesses when there is no more ‘bricks and mortar’ security to offer.
Banks generally have specialised Property departments which lend to property developers. They will require a detailed valuation of the end-value of any project and also a detailed costing by a Quantity Surveyor, so the funding can be drawn down in line with each stage of construction. Whether the construction is undertaken by the borrower or a contract builder, the bank will need to have comfort that the project can be delivered with time and budget.Banks will assess the construction risk, developer risk, liquidity risk and market risk as well as the capacity for the developer to service the residual debt should the sales/ pre-sales not be at a level where the debt will be completely extinguished by the end of the project. The analysis of these risks will determine the banks appetite for the transaction, margin and fees, as well as the LVR and pre-sale requirements.
Most businesses have capital requirements and like to finance plant and equipment. These days, asset finance is not expensive and quite simple. For most facilities under $150,000, lenders will not even need detailed financial information for established businesses.There are many things to consider when financing vehicles and equipment. An interesting point to consider is that if you have a home loan which you are servicing with your after-tax dollars, should you be repaying an asset-finance facility over a short term? Rather, you might consider securing it by your home and servicing it over 30 years, thus allowing you to further reduce the balance of your home loan, which is the one you service with your after-tax dollars.The old banking adage that the term of the loan must reflect the life of the asset is only appropriate when the asset itself is the bank’s security, which may not necessarily deliver the best tax outcome.
iChoice is well connected in the vastly expanding field of private funding.Those who may not have the time or ability to meet banks requirements can seek funding through private channels by offering either first or second mortgages over property. The LVR is normally reduced to protect the private lender and the interest rates higher due to the perceived risk.Having said that, many of the big-hitters in Australia need short term funding for projects who don’t want to deal with the banks, happily absorb the higher costs to free their activities.These funding arrangements are generally short-term and have a clearly identifiable exit strategy. The ‘Private Money’ field can be a bit tricky and borrowers must be well advised.
Medical practices can generally be 100% funded. The commercial building, if to be owner-occupied by the medical practitioner, can also be 100% funded. In the event that the acquisition is being made by partners, you may choose to reduce the lending ration in order to avoid providing personal (joint & several unlimited) guarantees.We will ensure you have initially expired the option of buying in a Unit Trust or a Self-Managed Super Fund (SMSF). Medical professionals can generally lease 100% of any fit out and specialised requipment. There are obvsiouly a couple of specialised lenders in this field, but the majors are now gettings into it too. We love helping medical practictioners achieve their goals safely tax effectively.If equity simply isn’t a challenge, you may choose to residentially secure the purchase of a commercial property or practice. This will attract a better rate and allow you ‘good’ debt to be serviced over a 30 years rather than the shorter term would be required for a debeture lend. This could possibly be the way to go if you’re carrying a non-deductible debt, or if a holiday house is on the cards and having non-deductible debt may be on the cards.