Lifting the lid: How lenders really assess commercial borrowers

As demand for commercial property grows, borrowers who treat the process like a home loan risk paying more or being knocked back altogether.

Commercial lending is opaque, negotiable and unforgiving. Rushed applications, vague loan purposes and incomplete financials can quickly translate into higher rates or outright rejection.

For many buyers stepping into commercial property, the biggest surprise comes not at the auction or contract stage, but at the bank. A commercial loan is not simply a scaled-up home loan and lenders assess risk very differently.

Commercial loans are not scaled up home loans. Picture: Getty

Those who prepare properly, however, can negotiate more competitive pricing and better loan structures, Adelaide-based Mortgage Choice broker Bhav Jaswal tells Mortgage Choice.

Unlike residential mortgages, commercial lending is largely unregulated and closely scrutinised, meaning banks look well beyond the asset itself, examining cash flow, tax compliance, lease security and how a business operates day to day.

Loan terms and interest rates

While home loans are generally to last for 25 or 30 years in Australia, commercial loans can sometimes be as short as three years.

“It depends on what sort of security you are providing,” Ms Jaswal explains.

While new government schemes are slowly knocking down the hurdle of high deposits which keep so many prospective buyers on the edge of home ownership, commercial loans are not seeing the same lower barriers to entry.

“Loan-to-Value Ratio for home loans is different, you can borrow up to 98%,” Ms Jaswal says. “Commercial loans definitely need more. For the last 16-plus years, I’ve not seen any commercial loan going up towards 95%. There are normally 20-30% deposits required, so 75-85% LVR.”

When it comes to interest rates, commercial loans still do not hold the upper hand on flexibility.

“So many factors are in place with commercial loans and normally you have to work on the rate, depending on your client’s profile.

“There’s a benchmark, but it can be negotiated depending on the strength of your client and their business.”

Preparation and paperwork

Flexibility – especially during periods of waiting – is another key consideration for borrowers when looking to stand out immediately.

While residential loans have a fairly simple criteria to ensure homeowners can service their mortgage, those looking for commercial backing need to be prepared to take the time to dive deeper.

“First of all, is your accountant prepared? How are your financials looking? Have you been regular in preparing your financials?” Ms Jaswal says.

“Some people have not even finalised their last two years’ worth. You have businesses which are still in business, but they said, ‘oh, we have not done 2024, we are in the process of doing it’, but we’re in 2026 now.

“If you don’t know your business very well, we have not seen profit and loss statements, the performance, what it is doing and how the business is trading and if it has a proper structure in place, then how are you repaying it? Knowing how thorough someone is in their payments will make a huge difference.”

Negotiation options

If a loan applicant has a solid business which is showing consistent performance over several years, there is space to negotiate with a lender, Ms Jaswal adds.

“If you have proper financials, you always get a good rate, but if you don’t have any financials then you don’t have a scope to negotiate.”

Correctly paying business tax and GST is crucial, as is filing personal tax returns on time, Ms Jaswal says. Another important piece of the puzzle is clearly defining where your profits are going and what it is that you actually intend to do with additional funds.

“You could make a profit of $100,000 and you can just put all that in your pocket. But then what are you doing with that profit? Are you reinvesting? Are you filing a proper return? Are you showing inflated expenses?” Ms Jaswal says.

“Lenders need you to be very thorough with this specific sort of a loan purpose and a business plan. The purpose should be clear. You can’t just go to a lender if you don’t have a solid reason behind it.”

In the case of new prospective borrowers, unrealistic expectations around commercial loan laws and lack of knowledge of the tight restrictions around loan usage is a common pitfall.

Securing a commercial loan easily requires an in-depth understanding of the business. Picture: Getty

“People often assume commercial loans are just like any other loan, particularly when it’s a new or upcoming business,” Ms Jaswal says. “Many don’t yet understand how the business structure is set up or exactly what sort of funding is needed for a business that is newly growing.”

Central within business structure requirements is separating personal loan usage from commercial options.

While borrowers will assume a personal loan can be used for business set up costs, such as purchasing a vehicle or specific equipment, it’s vital to ensure these are considered business expenses when it comes to securing future commercial loans.

“Sometimes people will just say ‘we need funding and we need it quick’.

Building a team

If borrowers work with a team of people who have not taken the time to build an in-depth knowledge of every part of their business, issues can also arise.

“You are putting yourself and your client at risk of getting a bad reputation with the lender straight away, because they will pick it up,” Ms Jaswal warns.

“The heads of big majors can blacklist certain accountants and blacklist certain customers, because the moment the financials come in, they know they are not correct.”

Concerns could range from excessive expenses, borrowing too much from the business, cash reserve concerns, or cash flow trends, through to high profits without good cash flow.

“It can be picked up,” Ms Jaswal warned. “Even if someone thinks they can manipulate figures, it can be seen on paper the moment it comes in with commercial loans. They have credit analysts who read applications very thoroughly.”

Commercial loan applications are scrutinised closely. Picture: Getty

Assumptions unpacked

The most common slip up for a prospective borrower when applying for a commercial loan is expecting an immediate outcome.

While a residential loan can be turned around quickly, commercial loans take significantly longer.

“The misconception about time frame turnaround is one of the biggest assumptions,” Ms Jaswal says. “It’s not just two pay slips, one driving license, one Medicare card, do the numbers and then done and dusted.

“I have commercial clients where I have been working on their file for two years.”

This article first appeared on Mortgage Choice and has been republished with permission.