By Nick Lim, FBAA-accredited finance broker, Switchboard Finance, Melbourne
Australia has about 2.6 million actively trading businesses, according to the Australian Bureau of Statistics, and the overwhelming majority of them are small. Most rent their business premises. A growing number, particularly in trades, manufacturing, hospitality, and professional services, reach the point where buying the building makes more sense than paying a landlord to own it. That is where a surprising number of otherwise capable operators make their first serious financing mistake.
The mistake is not the decision to buy. It is assuming that a commercial property loan works like the home loan they already have. It does not, and the differences are structural rather than cosmetic.
The first difference is regulatory. Under the Australian Prudential Regulation Authority’s capital framework, a bank must hold materially more capital against a commercial property exposure than against a standard owner-occupied home loan. That is not a bank being difficult. It is an arithmetic set by the regulator, and it flows straight through to pricing, maximum loan-to-value ratios, and the appetite a bank has for a particular borrower. A business owner who walks in expecting a 90 percent loan at a home loan rate is asking for a product that does not exist.
The second difference is how the borrower is assessed. A home loan looks at payslips. A commercial property loan looks at the business: its financials, its lease or occupancy arrangement, its industry, and often the personal position of the directors behind it. Self-employed applicants, who are the bulk of premises buyers, frequently present income that is real but irregular or that has been legitimately minimized for tax. Banks are built to read payslips, not add-backs.
The result is that the borrower who most needs the premises is often the one the bank finds hardest to approve. Business owners who want to understand what commercial property loans cost in Australia, including the rate bands, fees and loan-to-value limits that apply outside the banks, should look at that pricing before they look at property listings, not after.
The third difference is time. Commercial property settlements are often shorter than the bank’s assessment window, and vendors of commercial business premises finance are less patient than vendors of houses. A buyer who signs a contract and then starts the bank process is already behind.
This is the gap the non-bank market has grown into. The Reserve Bank of Australia has noted in successive Financial Stability Reviews that non-bank lenders have expanded their share of business and commercial property lending, funded largely by wholesale investors and private credit rather than deposits. Because they sit outside the deposit-taking capital rules, non-bank lenders can price a commercial exposure on its own merits: the quality of the security, the strength of the lease, the exit, and the borrower’s actual cash flow rather than the form it arrives in.
The lesson for business owners is not that non-bank finance is always better. It is usually more expensive, and it should be. The lesson is that the choice of lender should follow the shape of the deal, and most owners choose the lender first and then try to bend the deal to fit.
Three habits separate the operators whose business premises finance well from those who do not.
First, they price the whole transaction before they commit. Interest is only one line. Establishment fees, valuation costs, legal costs, and any exit or break fees change the effective cost of a facility considerably, and the cheapest headline rate is often not the cheapest loan over the period the borrower actually intends to hold it.
Second, they match the loan to the plan for the building. An owner who intends to hold the premises for twenty years and pay it down has a different optimal structure from one who is buying to develop, subdivide or refinance within three years. The second borrower is often better served by a shorter, more flexible non-bank facility at a higher rate, then a refinance into cheaper money once the business and the building have a track record. Paying for flexibility you will never use is as wasteful as lacking it when you need it.
Third, they treat their financials as a product. Lenders of every kind lend against information. A business with clean, current accounts, a signed lease or a clear occupancy plan, and a plausible exit will be assessed faster and priced better by any lender, bank, or otherwise. The owners who struggle are rarely the ones with weak businesses. They are the ones whose paperwork does not show the business they actually have.
None of this is unique to Australia. Prudential capital rules, self-employed income and settlement timing create the same pressures in every developed market, and the private credit sector that has grown up alongside the banks in the United States and Europe is filling the same gap for the same reasons. The Australian market is simply a clear example, because its banking sector is concentrated, its regulator is explicit about capital, and its small business base is large.
The practical conclusion for any owner thinking about buying their business premises finance is short. Understand the cost structure of commercial lending before you shop. Decide what the building is for before you decide on a lender. And prepare the business’s paperwork as carefully as you would prepare the building for sale, because to a lender, the paperwork is the business.
