Commercial Property and Business Lending at Hatch Financial Services

Commercial loans are often structured based on the specifics of the project or property and the borrower’s business scenario, making them inherently more complex than residential loans. For instance, repayment terms might be structured to align with the expected cash flow from a commercial property, such as a hotel or retail park, which can have seasonal revenue fluctuations. Additionally, commercial loans may include covenants or conditions that require the borrower to maintain certain financial ratios or meet specific operational benchmarks.

Typically, commercial loans carry higher interest rates compared to residential loans. The reasons are multifaceted but primarily reflect the higher risk associated with commercial lending. Commercial properties are more sensitive to economic downturns, which can affect their occupancy rates and, consequently, their income generation capabilities. Higher fees are also common in commercial lending, compensating for the additional work involved in underwriting and managing these loans, which often includes detailed appraisal processes and legal reviews.

Whereas residential loans are primarily assessed based on the borrower’s ability to repay the debt, evidenced by personal income and credit history, commercial loans are evaluated largely on the property’s ability to generate income. Lenders will carefully analyse the property’s cash flow potential and the borrower’s business acumen and history. This assessment might involve reviewing tenant leases, revenue projections, and the operating history of similar properties in the area.

In commercial lending, the LVRs are generally lower than in residential lending. This means that borrowers must either put down a larger deposit or possess significant equity in the property being financed. The reason for lower LVRs in commercial finance is due to the higher perceived risk and the potential for greater price volatility in the commercial property market.

The process of securing a commercial loan generally involves more extensive documentation and due diligence compared to residential loans. This can include providing business plans, profit and loss statements, balance sheets, and property feasibility studies. The thoroughness of this process helps lenders mitigate risk but also requires borrowers to be more prepared and organised in their loan applications.

Commercial loans are subject to different regulatory standards than residential loans, which can affect the lending terms. For example, the regulatory oversight on commercial lending is often less stringent, which allows for more flexibility in the loan terms but also places a higher responsibility on the borrower to understand the terms fully.