Buying your business premises: how lenders assess an owner-occupier

The simplest check a lender runs is rent versus repayment. If the business pays $80,000 a year in rent and the loan repayment on the purchase would be $95,000, the lender wants to see that the business can absorb the $15,000 difference plus outgoings it now carries as owner. If the repayment is below the rent, the file is easy. Interest only periods and longer terms bring the repayment down, and lenders will use them where the business is sound.

Two years of financial statements and tax returns for the trading entity, interim management accounts, BAS to confirm current trading, ATO portal showing lodgements and any debt, and the directors' personal statements. Lenders add back rent to the profit, since it will be replaced by the loan, and look at trends: a growing business buying premises it has outgrown is a good file; a shrinking business buying premises to own something is not.

The premises are usually bought in a separate entity, a trust, a company or an SMSF, and leased to the trading business at market rent. This protects the property from trading risk, allows the property to be sold without selling the business, and gives the business a deductible rent. Lenders lend to the holding entity with guarantees from the directors and treat the trading business as the tenant. If the trading entity buys directly, the lender assesses it the same way but the property is exposed to the business's creditors.

The cost of fitting out and relocating is not funded by the property loan. Lenders finance fit-out separately as a business or equipment loan, and the borrower should budget for downtime and double costs during the move. Buying a premises that already suits the business avoids most of this.