Interest rates on commercial loans are calculated through a variety of factors. Taking out a commercial loan can be a significant decision, so it is important to understand the factors and calculations that go into the interest rate you will be charged on the loan. In this article, we’ll run through some factors that affect loan rates. Let’s get started.
Loan security
A commercial loan’s interest rate is largely determined by its security. Lenders look for collateral to secure the loan in case the borrower defaults. The stronger the loan security, the lower the interest rate will be. Security can come in the form of cash or other residential or commercial property holdings. It also frequently comes in the form of personal property, which is any property of the business aside from land, fixtures, and buildings. Company vehicles, tools, goods produced by the business (such as wine or furniture), intellectual property, and commercial licenses can all be considered personal property.
Loan-to-value ratio
Commonly known as the LVR, the loan-to-value ratio is one of the key factors in determining the interest rate on most commercial loans. This ratio measures the size of the loan compared to the value of the asset being purchased. A higher LVR means that the borrower is taking on more risk, resulting in a higher interest rate. While maximum LVRs can vary based on circumstances, a common maximum LVR for commercial lending is 70%.
Tenant profile and lease term
The tenant profile and lease term are important considerations when calculating the interest rate on a commercial property loan in Australia. In addition to assessing the creditworthiness and financial stability of a potential tenant, a lender will also look at the length of the lease agreement. A tenant with a strong financial profile and a long-term lease will likely receive a lower rate.
Borrower’s assets and strength
The borrower’s assets and strength determine the interest rate on a commercial loan. As with loan security, lenders will look at the borrower’s financial strength and existing assets. A borrower with a strong financial profile and a good track record of managing debt will be more likely to secure a lower interest rate.
Location and security of the asset
The location and security of the asset being purchased can also impact the interest rate on a commercial loan in Australia. Lenders may consider factors such as the stability and security of the location when determining the interest rate. For example, a potential increase in the asset’s value will be considered.
Type of security or property purchased and borrower credit score.
Commercial property types, such as office, industrial, and retail, are considered stronger investments and may result in a lower interest rate. Other property types may be considered riskier investments and result in a higher interest rate. Finally, the borrower’s credit score is also a small factor in determining the interest rate on a commercial loan. A borrower with a high credit score will be more likely to secure a lower interest rate, while a borrower with a low credit score may face higher interest rates.
Why work with Perry Finance?
Our Melbourne team of brokers are able to tailor personalised finance solutions to meet the unique needs of your business. Throughout the loan application process and into the post settlement stage, you’ll benefit from our broad industry knowledge and experience in the commercial brokerage space.
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