Insights To Securing Financing

Several advantages make owning commercial or business property a viable prospect for small businesses. These include asset appreciation, full control over interior design and renovations, security of tenure, and avoidance of above-inflation rent hikes. Small and medium enterprise (SME) owners need to be prepared when applying for finance for commercial property. 

The process

Acquiring funding for business property involves more rigorous vetting procedures and due diligence than applying for residential property. 

Small business owners need to ensure that their application inspires confidence in the financier, providing assurance that the purchase is financially feasible in terms of the asset’s future value of the asset and the track record of the business purchasing the business property.

Financiers interrogate funding applications on three fronts: 

• the state of the client’s business;

• the viability of the transaction; and

• the value of the property being acquired. 

Research and preparation are key to successfully securing funding for commercial property. This relates to how supporting documents and information on the business are collated and presented, as well as aspects that position the property in a favourable light as a good investment. 

Apart from the documents required for FICA purposes, SME financiers and other financial institutions will require a detailed business plan. This must be accompanied by a strong finance proposal backed by the business’s annual financial statements. 

When reviewing funding applications, some of financiers’ considerations include the business’s credit history and, in many cases, the owner’s credit record. 

Arguably, the most important aspect to be reviewed is the business’s cash flow management. As our quarterly SME Index continues to demonstrate, cash flow remains the number one challenge for South African SMEs. As such, applications need to shed light on whether consistent, adequate and sustainable cash flow will be maintained over the loan period, and how any potential shortfalls will be subsidised.

Financiers may require information on the history and current condition of the property, including aspects such as whether it has been well maintained and if any major structural issues have been identified. Required documentation will include the purchase agreement from the estate agent or current owners and any rental agreements that may apply to current or future tenants (in the case of plans to sublease). 

The property’s location also plays a pivotal role in the decision-making process. Financiers will consider aspects such as crime rate, the reliability of public services in the area, proximity to competitors, the condition of surrounding buildings, and whether any new developments are planned in the area. Entrepreneurs also need to ascertain whether the property complies with municipal regulations. This will influence the ability to raise finance and get the property properly insured. 

Considerations

Once the research and preparation are complete, SME owners are advised to review their options in terms of the interest rates and repayment options made available by banks, lenders and independent financiers. 

Major factors to consider at this stage are lending rates, the term, the size of the bond, and any related fees, for example, administration, payments to attorneys for legal services and VAT. SME owners need to enquire if these costs will be incorporated into the loan amount or become payable separately. 

The distinction between commercial and residential properties has a bearing on the loan term, given that business property is regarded as an income-generating asset. Generally, banks expect loans to be paid off faster than residential bonds. 

Although SME owners may intuitively think of banks as their primary option for funding, established entrepreneurs should consider alternatives. 

Our research and experience have shown us that in the initial stages of securing financing for commercial properties, one of the major pain points for small businesses is accumulating enough capital for a deposit. A deposit-free funding option may be more viable and accessible. In these cases, SME owners need to understand the conditions of a deposit-free loan and how it differs from traditional financing.