Specialist finance

What are commercial mortgages?

As a small business owner, you've probably had to think seriously about financing your business. The world of finance can be complicated, so it's essential to understand all the options available to you. If you want to secure funding for an investment property or equipment for your business, it’s worth investigating commercial mortgages.

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Commercial mortgages are loans for businesses, and property investors can use them to purchase assets that generate income but require high up-front costs (or have long payback periods). They're designed primarily for large purchases like office buildings or warehouses; they're not usually intended for smaller projects such as purchasing new equipment or production materials. But when used correctly, these loans can significantly benefit borrowers and lenders alike.

What is a commercial mortgage?

A commercial mortgage is a loan that is secured by a business property. You use the asset as collateral for the loan and pay it back over time with interest. The borrower must have a good credit history and enough income to make the repayments.

The lender will take a security interest in the property, which means they can take possession of it if you stop paying your mortgage. They may also require you to pay a premium as part of your original application for finance or renew your existing mortgage (called 'remortgaging').

How do commercial mortgages work?

A commercial mortgage can be used to purchase property such as a building, land or commercial real estate. The lender will hold the title to the property until you have paid back all of your loan payments. If you default on your payments, the lender may take possession of the property and sell it to recoup their losses (in which case you'll still be responsible for paying off any debts you owe).

In Australia, commercial mortgages are used by small businesses to finance their working capital. Most banks will require a business to have been in operation for at least 12 months before they are eligible for a commercial loan.

When you take out a commercial mortgage, you will be required to repay the loan over a fixed period of time. The amount you can borrow is based on your income, debt and assets. As with any other type of loan, you need to make sure that you can afford the repayments before applying for one. The process of applying for a commercial mortgage is similar to applying for an ordinary home loan. You will need to provide documentation about both yourself and your business such as financial statements and tax returns.

You will also need to demonstrate how much money you need and how it will be used by providing cash flow forecasts and management accounts – often for at least three months into the future. These documents will help your bank assess whether your business has enough cash coming in and if it has enough assets that it can use as security against the loan.

What can a commercial mortgage be used for?

Commercial mortgages can be used to buy property, refinance an existing property, buy land and build on it, or buy facilities for the business. They can also be used to pay for renovations necessary for a business's operation. Commercial mortgages can be structured in one of two ways:

  • Purchase mortgages – used by borrowers who want to buy a property using finance from a bank or other lender; and
  • Refinancing mortgages – used by borrowers who already have some form of security over their existing property (i.e., they have owned it for some time) but want to take advantage of lower interest rates available on new loans at the time they come up for renewal, or who want lower monthly payments (or both).

Benefits of commercial mortgages for small businesses

As you can see, there are many benefits to taking out a commercial mortgage for your business. One of the most significant advantages is that it will likely reduce the cost of borrowing compared to other options and provide you with greater flexibility. You'll also be able to borrow more than you would with a personal loan, which may allow your company to expand.

Another benefit is that commercial mortgages allow borrowers to use the property as collateral for loans—making them one of the most secure sources of financing available today. This will enable businesses with good track records to finance projects they otherwise might not have had access to -- without paying exorbitant fees or interest rates.

How to get a commercial mortgage loan in Australia

Get a lender that can help you. In Australia, commercial mortgages are regulated by either the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC). You need to know which one governs your mortgage before applying for it. Get pre-approval from your bank or credit union before starting shopping for commercial properties, so they can work with you while you do so. If they don't give this to you, consider finding another financial institution.

Have the right qualifications in place—for example: having good credit scores and debt-to-income ratios; having enough collateral if needed; being able to demonstrate cash flow projections for your business plan (this shows how much money is coming into versus leaving each month), and so on.

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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