How do commercial property loans work?

Small Business Guides

3 min read

Thinking of buying a new building for your business? We look at the kind of loan you’d need to make it happen. Here’s your introduction to the world of commercial property loans.

Commercial property loans vs home loans

When you buy a house, you go to the bank for a home loan. When you buy a building, you do the same – but instead of a home loan, you get a commercial property (or real estate) loan.

Commercial property and real estate loans are similar to traditional home loans in some ways. You pay interest on the money borrowed, and the loan is usually secured by a lien on the property, which gives the lender a right to ownership if the debt isn’t paid. (A mortgage is a type of lien.) But there are significant differences.

Six key differences between a commercial property loan and a home loan

Commercial property loans are generally seen as bigger risks by lenders and so the terms are more demanding.

1. You’ll need more skin in the game
While a bank might lend you up to 90% of the value of a house, they’ll cover less of the cost of a commercial property. You may need to front with 30% or more of the money yourself.

2. Higher interest rates
Because lenders see commercial property loans as a greater risk, they charge more interest.

3. Higher bank fees
You may have to pay for the building to be appraised or surveyed.

4. Less time to repay
Commercial property loans generally need to be repaid somewhere between five and 20 years (compared to the 30 years given on most home mortgages).

5. You may take on some personal risk
If your business doesn’t have a long credit history, you may have to personally guarantee the loan. That allows the lender to sue you personally if your business defaults on repayments.

6. You may have to make a balloon payment
Commercial property loans often finish up with a balloon payment. For instance, the loan term might be five years, but the repayment amount is calculated over 25 years. You’ll make repayments for five years and then a final large repayment – the balloon repayment.

What is a commercial property bridging loan?

Imagine you’ve seen a commercial property you want to buy. But you can’t buy it until you’ve arranged finance through your bank, which may take weeks. To remove the risk of losing out, you can get a commercial bridging loan.

A bridging loan is a quickly arranged, short-term commercial property loan that you can use until you can get a longer term deal in place. Bridging loans are usually set up as interest-only loans, where repayments are for the interest and not the capital. This is because you’re expected to be in the arrangement for only a short time.

How to get a commercial property loan

If you’re buying a commercial property, most lenders will require your business to occupy at least 51% of the building. And you might need to have your business structured as a company – if you’re a sole proprietor they’ll want to treat the loan as a personal loan rather than commercial. Learn more about business structures in our guide on how to start a business.

The lender will compare your annual net operating income (NOI) to the annual repayment amount to see if your business can afford repayments. You’ll need to show these financials:

  • bank statements

  • balance sheet

  • income statements

The lender will also want to see the details of all the business owners, partners or directors.

You’ll also be expected to have commercial property insurance, and perhaps continuity insurance. This is so you can still afford repayments if disaster strikes and your business takes some time to recover. Learn more about business insurance.

Want to know more about business finance?
If you need money for anything else in business, from starting up to buying inventory, expanding, or hiring staff, check out our guide to getting business finance.