Commercial property Procurement
6 mins read

Can a business buy a residential property in Australia?

Commercial property
Can a business buy a residential property in Australia?

A business’ revenue, or credit, can only be used to buy commercial real estate, which has the express purpose of being used for commercial ventures. In instances of a mixed-use block, a commercial loan product may be available to account for a percentage of the purchasing price. You cannot redirect funds gained from a commercial loan application towards the purchase of a private residential property. 

What kind of property can a business purchase in Australia?  

Can a company buy a house? Speaking broadly, no they can’t. Businesses within Australia can only use their funds, whether that be cash in the bank or a line of credit, to purchase property that has a commercial purpose. Examples include shopfronts, shopping centres, the floor of a business tower, a workshop and more.  

These funds cannot be used, by ownership, directors, managers or other employees for the purchase of a solely residential property. Credit for those purchases has to be secured through a residential home loan as opposed to a business loan product. The information used to assess creditworthiness for each entity (individual vs business) is different and therefore these credit streams cannot be crossed over each other. 

When assessing businesses, loaning institutions will access extensive creditworthiness information and reporting from agencies such as CreditorWatch to inform their decision-making. An individual’s credit file is held separately, by different bureaus, and independently informs the loaning institution’s assessment of individual borrowers. A business owner’s home loan application is distinct from a commercial loan for their business.  

What about a mixed-use property? 

Mixed-use property implies that the property in question is part-commercial and part-residential, and such purchases are an exception of sorts. For those wondering “can you live in a commercial property?”, this is the type of asset that may allow for a variation. There are specific commercial and residential loan products available that will allow you to account for a percentage of a mixed-use property’s value based upon an assessment of the property, its intended usage and previous state.  

For example, most lenders will judge mixed-use spaces with significant office or retail floor areas to fall within the commercial loan category. However, a terrace house with small business owners operating out of a converted lower floor might still be considered to be fit for a residential loan.  

Generally speaking, the Loan-To-Value Ratio (LVR) when applying for credit to purchase a mixed-use property is lower than traditionally found in residential credit products. Residential loans often account for up to 80-90% of the value of the property. Typically, mixed-use commercial loans will allow you to borrow up to 75%. In other words, a business will have to front more equity to secure such a loan. 

What are the typical terms of a commercial property loan?

Various different loaning institutions offer commercial property loan products, and the time period for repayment, interest rate and credit assessments involved can all vary significantly. As with residential loans, there are loan products encompassing different interest rate and repayment types, such as variable rate, fixed rate, split rate, principal and interest repayments, and interest-only repayments. The loan term can range anywhere from one month up to a number of years.  

What is generally understood, is that a business is usually expected to front more of the equity for a property loan than an individual would be. The Loan-To-Value Ratio for commercial loans often sits at 70% or lower, requiring the business to pay 30% or more upfront as a deposit to secure the credit. As commercial property is often considered to have a higher risk profile than residential, the applicable interest rates are generally considered to be higher as well. At the time of writing, the interest rate for most commercial loan products exceeds 4%.   

What should my business consider before applying for a commercial property loan? 
  • What are the revenue projections? You need to ensure that there will be enough cash flow moving through the business to be able to service any repayments, especially if the interest rate is variable. You must allow some room, in case economic conditions or tax rates change and your customer base shrinks, so as not to immediately default.  
  • What income can the space earn? Are you buying the property to rent to a commercial tenant? Do you plan on moving into the space with your business? You need to know what the intention is for the space, and how it will be able to contribute to its own outgoings. There are repairs, utility costs and more to think about with a new space, and you need to be able to account for that.  
  • Is capital growth important? Are you buying the property with the expectation that you’ll sell it for a profit in the future? Or is this the forever-home for your enterprise? You need to be conscious of where you’re buying, especially if you intend on selling later with significant capital growth. Ensure you do your due diligence on location, access, amenities, future development plans and so on. 
  • How’s my creditworthiness? Prior to your application, utilise CreditorWatch’s Credit Reporting suite to ensure that you have positive creditworthiness information that could improve the chances of your application’s success. While you’re there, check the creditworthiness of trading partners to ensure that your business cash flow is secure enough moving into the future to account for repayments.  
Steps to buying a property as a business 

Step 1: Check zoning, usage and development rights 

Make sure that you know all of the details regarding the property you’re eyeing. How is it zoned (especially if you’re looking to buy land that is unimproved)? Is it fit for the business purposes you seek to use it for? What are the economic conditions in the surrounding suburbs? You need to do all the due diligence to ensure that the property can be used for your intended purposes, both legally and practically speaking.  

Step 2: Assess what type of loan you need (if you need one) 

This only applies if you need to secure credit for the purchase. Do you need an interest-only loan to keep expenses down? Or perhaps you prefer a variable rate loan? You need to consult with your financial advisors for your business, as well as the loaning institutions, in order to isolate the credit products that will best suit your particular needs. As with buying a house outright with cash as an individual, if your business has the equity then it may not need to apply for credit.  

Step 3: Ensure your business and its trading partners are creditworthy with CreditorWatch 

Leverage our extensive Credit Reporting suite and its accompanying tools to ensure, to as great an extent as possible, that you will be positively viewed by creditors when assessing any application your business makes for a loan. While you’re there, credit-check your trading partners in order to safeguard your cash flow in the apprehension of repayments. Risky entities and late-paying clients could severely limit your business’s ability to service a commercial property loan.  

Step 4: Get your documentation in order  

There are various documents that may be required in order for you to secure a business property loan and purchase a commercial property. These may include financial records, intentions for the property and expected income, business details and so on. Ensure that you have all relevant documentation accessible, with the correct information, so that you can provide it when necessary. 

Step 5: Secure your credit 

Apply to the relevant institutions and see if they will approve your business purchase loan application to allow you the funds to purchase the commercial property. This step only applies if your business does not already have the money in the bank to purchase such a property outright.  

Step 6: Transact with a commercial realtor 

If you have scoped the property, secured credit (if you need it), and provided all of the necessary details, then it’s time to make an offer! Speak to the realtor listing the property and commence the process of making an offer.  

Protect your cash flow with CreditorWatch 

One way to ensure you can comfortably service a loan for a commercial property is to know that your cash flow is protected from late-paying entities and risky debtors. The optimal way to manage this credit risk exposure is with the comprehensive suite from CreditorWatch.   

Our RiskScore and Credit Reporting technology allows our clients to easily identify partner businesses likely to default, pay late or expose them to bad debt. If any critical information changes, they will instantly receive an automated alert courtesy of our 24/7 Monitoring and Alerts system. As new customer businesses engage, they can be onboarded and managed through the use of our proactive debtor management platform: DebtorLogic. Any late-paying clients can immediately be followed up with the intuitive resources and templates from CreditorWatch Collect. 

When you feel your cash flow is secured, you can pursue the purchase of assets such as commercial property with far greater confidence.  

To empower your decision-making, speak to our team today.

commercial loan commercial property commercial property loan
Sarah Ward
Business Development Specialist | Credit management and Collections
Sarah is a highly experienced business risk, credit management, collections and business development specialist with over 10 years of experience. She is an expert in identifying and mitigating risks and has helped numerous businesses gain a deep understanding of the latest trends in credit management. Sarah’s recent work includes writing about high-risk businesses and how to identify them and providing insights on using a risk assessment tool like CreditorWatch’s RiskScore to make informed decisions. She also emphasises the importance of performing due diligence on new clients to assess their credit risk and mitigate cash flow risk. Additionally, Sarah has also written about cash control and how to improve debtor management. Sarah’s recent work includes writing about high-risk businesses and how to identify them and providing insights on using a risk assessment tool like CreditorWatch’s RiskScore to make informed decisions. She also emphasises the importance of performing due diligence on new clients to assess their credit risk and mitigate cash flow risk. Additionally, Sarah has written about cash control and how to improve debtor management.
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