Commercial loans come in all different shapes and sizes. It could be a mortgage on a commercial property or a loan to cover business expenses such as new equipment, company vehicles and other operating costs.
There are many commercial lenders in Australia offering a range of products suitable for SMEs, from small, short-term business loans to larger, longer-term loans.
If you haven’t gone down this road before, the world of commercial lending might seem complex, but as soon as you understand the basics, you’ll start to feel more at ease.
Here’s everything you need to know about commercial loans.
How commercial property loans work
Commercial mortgages are very similar to home loans and investment loans.
You’ll borrow a certain amount over a set term and make regular repayments with interest. The loan could have a variable, fixed or split interest rate and could be structured as either principal and interest or interest-only.
As commercial property loans are seen as higher risk than residential loans, most products will generally have –
- Higher interest rates
- Shorter loan terms
- Larger repayments
- Less repayment flexibility
Most lenders will also require a larger down payment for a commercial mortgage, as opposed to residential home loans that may have low deposit options available.
What’s the difference with a business loan?
While a commercial property loan works in a similar way to a home loan, a business loan is comparable to a personal loan.
Both can be used for a range of general expenses, the major difference between them is whether you intend to use the loan for business or personal use.
Just like a personal loan, a business loan can be set up as secured or unsecured on either a fixed or variable interest rate.
If you have an asset to secure against your business loan (property, share portfolio etc.), you will be more likely to get a loan product with a lower interest rate.
As an unsecured loan comes with more risk, it will likely have a higher interest rate.
You could also take out a business loan to purchase another business.
In this situation, you would need to have equity in the business to be approved for the loan, which would involve putting your own money toward the purchase.