Commercial Property Financing: Options and Considerations
Category Industrial Property News
Are you thinking about taking a leap into the world of commercial property? Investing in commercial property has a lot of pros, but one con that keeps a lot of people from taking the next step is financing.
The process of securing funding for the purchase of commercial real estate can be daunting, especially if it's your first foray into this industry. However, this shouldn't hold you back. There are a few key points to understand and keep in mind to increase your chances of getting financing and making a solid investment decision:
Understand The Financing Options Available
There are different financing options for South Africans to choose from. Your choice will depend a lot on your current financial position, whether you're counting on selling another property to help finance the commercial property, as well as your appetite for risk.
1. Conventional Loans:
These are traditional mortgages offered by banks, credit unions, and other financial institutions. Conventional loans typically have fixed or adjustable interest rates and are available for a variety of property types. This type of loan usually has more stringent eligibility requirements compared with other types of loans. Also, a high down payment may be required and options for repayment terms and interest rates are limited.
2. Small Business Loan:
While a conventional loan is a mortgage that is issued to an individual or business that is buying or refinancing a property for personal or investment purposes, a business loan is a loan that is issued specifically to a company for the purpose of financing business-related expenses, including commercial property. This type of loan usually offers more flexibility in terms of eligibility requirements, repayment terms, and interest rates. "Small business owners can apply online to qualify for a business loan in South Africa. The minimum criteria for the business loan can include that your business has been trading for 12 months. A lack of financing readiness is one of the biggest reasons business loans applications get rejected," explains SME South Africa.
3. Bridge Loans:
This is a short-term financing solution typically used to bridge the gap between the purchase of a new property and the sale of an existing property. A bridge loan is usually accompanied by higher interest rates and fees than other types of loans, but you can get access to funds fast. "One of the most popular short-term financing methods for entrepreneurs, bridge loans can be set up quickly and are often simpler to arrange than other forms of financing," tells Caban Investments. This can be the perfect option for time-sensitive property deals.
4. Mezzanine Loans:
This loan combines debt and equity, and is typically used to finance large commercial properties. Mezzanine loans are considered to be higher risk than other types of loans and have higher interest rates and fees. Nedbank gives this example: "...an investor might only be able to obtain 70% of the property development funding required in the form of traditional senior debt and will need equity to cover the rest. If there isn't enough equity available, they'll either require additional equity investors or another financing source, such as mezzanine financing, to conclude the deal." What makes this option attractive for many people is the fact that, in commercial property deals, the property itself can be used as security for the mezzanine debt.
3 Factors That Will Impact Your Commercial Property Loan
1. Credit Score
Your credit score will play a big role in the type of load you can get. Not just your credit score, but also your small business' credit score. A business' commercial credit score is determined by an algorithm that takes several data points into consideration: Information from debt collection services and debt review companies, public records from government institutions and banks, and formal complaints. The higher the credit score, the lower the risk for lenders.
2. Current Financial Status
Before jumping into the financing process, determine how much you can afford to borrow. A variety of factors need to be taken into consideration, such as your credit score, your business' credit score, the type of commercial property you're interested in, and whether you can leverage other assets or have cash for a downpayment.
Tip: Work with a professional real estate broker. There's a tonne of jargon and hoops to jump through when it comes to investing in commercial property. Working with a commercial real estate broker can help guide you through the process, connect you with the right lenders, and lead you to the properties that are worth the investment.
3. Your Business Plan
Lenders want to see what exactly they're financing - not just the property, but your plans for it. A solid business plan that includes your strategy and financial predictions (including income from the property and expenses) is more likely to be considered.
Current Lending Rates
Interest rates vary according to a few factors, namely the lender, the credit score of the borrower, the type of loan, and the viability of the property being financed.
As of March 2023, the prime lending rate in South Africa is 11.25%. However, commercial property loans can sometimes be a different ball game. When investing in a commercial property, be prepared to sign up for a higher interest rate than what the prime is currently sitting at.
However, you can negotiate interest rates and loan terms with banks and other financial institutions. Interest rates are subject to change over time, and you should carefully review all loan terms and conditions before signing any agreements.
While commercial property financing can be a complex process, when you review loan options and work with industry professionals, the ROI for this type of property investment can be huge.
Take the next step by seeing the investment properties currently on offer.
Author: API Property Group
