By Brodie Gilbert
Commercial lending encompasses both property and business lending; allowing borrowers to gain access to funds for a large range of different business or commercial reasons.
The main differentiator between residential and commercial lending, other than the obvious types of property, is the approach lenders take when making assessments. Residential and any other ‘consumer’ lenders generally stick to a general set of policies that more often cater to the majority of loans. In most instances, lenders will tend not to vier from their particular policies. Commercial lending, on the other hand, takes a much more holistic approach due to the nature of businesses and their ever-changing requirements.
Commercial Lending Approach
This type of holistic lending more than often puts the responsibility on a particular manager or business banker to make the final call. This approach naturally comes with substantially higher risk; therefore the business lender will generally work to lower the risk by taking into account a number of factors that aren’t often used in residential lending.
Loan to Value Ratio (LVR)
LVR is the ratio of the loan compared to the value of the security expressed as a percentage. Commercial lending generally requires a much lower LVR than residential lending. Lenders mortgage insurance is not available in the commercial lending space therefore the maximum LVR allowable is less than 80%, however, depending on risk, this could be a lot lower. In an industry such as agriculture where the risks are quite large so the lender may have a maximum allowable LVR of 50%.
Cash Flow Forecasting
Many businesses are start-ups, therefore have minimal if not no history of income. In some instances, a lender may allow a cash flow forecast to ‘assume’ the future earnings of a business. This may come with a list of conditions such as owners time in the industry, if they have run a business before and if the forecast looks achievable.
If buying a commercial property, more than often the property being purchased will be used as security. In a case where a borrower would like to borrow funds for business operations, there is potential they can borrow against the equity in other properties they own whether they be commercial or residential. There are several ways to do this and is where a Finance Broker can help advise on certain options that would be best suited.
How We Can Help
There are many intricacies, complexities and other factors when it comes to commercial and business lending. Far too many to simply encompass in this article. We can help you look at many different options to see what will work best for your specific situation. Our team are not only Finance Brokers. We also have qualifications in accounting and financial planning which equips us with extensive knowledge when it comes to the dynamics of business and commerce; and what requirements businesses of all sizes have.