SMSF Commercial
Commercial loans can be great for Self Managed Super Funds (SMSF) that want to start up a business.
The difficulty is that some banks have strict lending policy and may not approve your application for a commercial loan.
How much can you borrow?
You can borrow up to 70% -80% of the property value although in many cases this may be restricted to 60%.
The interest rate will be higher than it is for residential properties purchased through a SMSF.
Most major banks will look to see if your asset position is strong. They will generally be more willing to lend to you where you have a wide and varied existing investment portfolio that will provide good security to the bank and minimise the risk of lending. Each lender varies significantly with both their LVR’s and interest rates.
Thinking of doing business? Commercial loans are popular with investors that are using their SMSF to secure finance so that they can carry out a commercial project.
Most banks will generally allow you to borrow money in your trust, as you would for commercial properties in your personal name. However, lenders will often reduce the amount that you are eligible to borrow.
This is because the risk is higher for these loan types and the bank tries to minimise this risk by restricting the LVR (Loan to Value Ration) of your loan.
Why are banks so conservative?
Unlike most conventional home loans for residential properties, commercial loans carry a higher degree of risk.
If the property that is being purchased is a shop or another type of income producing business, it will be subject to various economic conditions.
This will make it harder to assess the borrowers ability to service the loan and will increase the need for suitable security to ensure that the bank does not incur loss as a result of lending to you.
However, there is a chance that the security you offer could also devalue, which makes it even more difficult for the banks to appraise.
Repaying the SMSF commercial loan
Often the repayment of the commercial loan is dependent on the financial success and viability of your business.
It follows that if the business is experiencing cash-flow issues, your ability to repay the loan may be reduced. The banks take all of this into account when assessing how much you can borrow. Generally, most lenders will restrict the LVR of your commercial investment loan.
How does this differ from residential loans?
It may be significantly easier to obtain a residential loan for your SMSF.
This is because the bank will look at your income, as well as the value of the property you are buying.
It will be much easier for the lender to assess the value of your security type and it will generally be subject to less market volatility.
What is a commercial loan?
Commercial loans are generally taken out by businesses that need finance to fund their business activities.
For many businesses, this means purchasing property that will become the business premises. The site is then used to conduct and operate activities to generate an income.
The loan may cover expenses such as fit out and the purchase of supplies to assist in setting up and establishing the business.
Self Managed Super Funds (SMSF) can obtain commercial loans to fund their business activities, much like a company.
However, as with all other loan types, the SMSF will need to prove that they are able to repay the loan according to the loan agreement.