Starting a business or expanding an existing one often requires securing a property, and that’s where a commercial property loan comes into play.
For many Australian business owners, the question isn’t just about finding the right property—it’s about understanding the financial commitment required upfront.
How much deposit do you need to secure such a loan? This question is critical, as it shapes your planning and borrowing strategy.
This blog provides a clear, detailed guide on the deposit requirements for a commercial property loan in Australia and more.
Understanding Commercial Property Loans
A commercial property loan is a type of financing used to purchase or refinance properties intended for business purposes, such as offices, retail spaces, or warehouses.
Unlike residential mortgages, these loans are tailored for commercial use, often involving stricter criteria and higher interest rates.
The deposit, a key component, represents the upfront cash you contribute towards the property’s purchase price.
This is how lenders evaluate your dedication and financial strength. But what exactly determines the deposit amount? Let’s explore the core factors.
Key Factors Influencing Deposit Requirements
Several elements determine how much deposit you need for a commercial business loan. These include the lender’s policies, the property’s value, your financial profile, and the loan structure.
Below, we outline the primary influences:
- Loan-to-Value Ratio (LVR): Most commercial loan providers use the LVR to decide the deposit size. LVR is the loan amount divided by the property’s value, expressed as a percentage. For example, an 80% LVR means you need a 20% deposit.
- Property Type and Condition: Lenders assess the property’s marketability and risk. High-demand properties, like city-centre offices, may require lower deposits than specialised assets, such as rural warehouses.
- Borrower’s Financial Strength: Your credit history, business revenue, and existing debts are scrutinised. Strong financials can sometimes reduce the deposit needed.
- Loan Purpose: Whether you’re buying, refinancing, or seeking commercial gap funding for development affects the deposit. Development loans often demand higher deposits due to increased risk.
Each lender has unique criteria, so requirements vary across commercial lending institutions.
Standard Deposit Requirements
Most commercial property lenders require a minimum deposit of 20% to 30% for commercial property purchases. This percentage applies to the total property value, not just the loan amount. The specific percentage depends on your business profile, property type, and chosen lender.
Property Type | Typical Deposit Range | LVR (Loan to Value Ratio) |
Office Buildings | 25-30% | 70-75% |
Retail Spaces | 20-30% | 70-80% |
Industrial Properties | 20-25% | 75-80% |
Mixed-Use Developments | 30-35% | 65-70% |
Business loan lender institutions assess commercial applications differently from residential loans. They examine your business’s cash flow, trading history, and ability to service debt payments. These factors directly influence the deposit percentage required.
How To Calculate Your Deposit?
You must comprehend the worth of the property and the lender’s LVR in order to calculate your deposit. For example, the loan amount is $800,000 if the lender gives an 80% LVR on a $1,000,000 property.
This means you must provide a $200,000 deposit (20%). Some lenders may allow flexibility, such as using equity from other properties to offset the cash deposit.
However, additional costs, like stamp duty or legal fees, are not typically included in the deposit and must be budgeted separately.
Alternative Deposit Sources
Commercial business loan applications don’t always require cash deposits. Lenders accept various deposit sources that can reduce your upfront cash requirements.
Existing property equity serves as an acceptable deposit source. If you own residential or commercial property with sufficient equity, this can substitute for cash deposits. The equity valuation must meet lender criteria and loan-to-value ratio requirements.
Term deposits and managed investments qualify as deposit sources. These assets must be readily accessible and not subject to significant withdrawal penalties. Lenders typically require these investments to remain in place until settlement completion.
The director guarantees that, combined with property security, it can reduce deposit requirements. This option involves personal property as additional security, which may lower the cash deposit needed.
Deposit Requirements By Lender Type
Major banks maintain conservative deposit requirements, typically demanding 25-30% deposits. Their assessment processes are thorough but often slower than those of alternative lenders.
Commercial loan providers outside the major banking sector offer more flexible deposit arrangements. Non-bank lenders and specialist commercial financiers may accept lower deposits for strong applications.
Private lenders provide the most flexibility but charge higher interest rates. These lenders may accept deposits as low as 15-20% for exceptional applications with strong security positions.
Industry-Specific Considerations
Different industries face varying deposit requirements based on perceived risk levels. Healthcare, education, and government-leased properties often qualify for reduced deposits due to stable tenant profiles.
Hospitality and retail businesses may face higher deposit requirements due to industry volatility. Commercial gap funding solutions can bridge deposit shortfalls for businesses in these sectors.
Manufacturing and industrial businesses benefit from competitive deposit requirements when purchasing purpose-built facilities. The specialised nature of these properties can work in your favour with the right lender.
Frequently Asked Questions (FAQs)
Why Do Lenders Want a Deposit?
Lenders view a deposit as a risk control mechanism – a borrower’s own funds mean the lender has less exposure. It also indicates that the borrower has ‘skin in the game’ when making the investment, and there is an increased chance of repayment.
How Deposit Affects Loan Structure
Depending on the size of the deposit, you may get a better deal on the loan, since a deposit really reduces the amount you are borrowing, thus a lower loan and repayments and ultimately interest costs. Conversely, with no deposit, you will normally face a higher interest rate or stricter terms. For example, the bank may require a higher payment to offset the risk.
Can You Use Equity as a Deposit?
Yes. Many times, borrowers use the equity in their existing property as the deposit. This is a tried and trusted method, especially relevant when obtaining commercial gap funding. Borrowers have the ability to release equity in either residential or commercial property using second mortgages or caveat loans to fund the deposit.
Ready To Move Forward Without The Usual Deposit Roadblocks?
Sourcing funds, but concerned your deposit isn’t going to be sufficient? At Knote, we make it quicker and easier to get a Commercial Property Loan approved without having to wait for long documents, worry about documentation, and apply with no credit checks.
Flexible arrangements like commercial gap funding and same-day decisions for funding, and loans secured by the equity you already have, provide an alternative when banks just say no. Apply today and find out exactly how easy and quick business funding can be.
