Lenders assess a manufacturing facility purchase on two things: the strength of your business cash flow and the quality of the property as security. Preparing both before you make an offer gives you more loan options and a stronger position when a property comes up.
Planning matters for Hawthorn business owners because you may need to act quickly when the right property comes up.
How Do Lenders Assess a Loan to Purchase a Manufacturing Facility?
Lenders look at whether your business earns enough to cover the repayments and whether the property is suitable security. They test the first through your business financial statements and the second through a valuation.
The measure most commonly applied is the debt service coverage ratio, which compares your income available for repayments with the repayments themselves. A lender will usually want to see your recent financials, your existing debts and a clear explanation of how the facility supports the business. A cashflow forecast showing how the move affects revenue and costs also helps. Requirements differ between lenders, so the same business can receive different outcomes from different institutions.
It also helps to know your position before you inspect properties. Our borrowing capacity page is a useful starting point, and a broker can then test your numbers against several lenders.
Secured or Unsecured: Which Loan Suits a Factory Purchase?
A purchase of this size is usually funded with a secured business loan, where the facility itself is held as security. An unsecured business loan suits smaller needs, such as working capital, and generally has a lower limit and a higher rate.
The trade-off with a secured loan is that the lender can sell the property if repayments are not met. Some lenders may also ask for additional security, such as a residential property, depending on the deal. Using your home as extra security can reduce the deposit you need, but it places your family's home at risk if the business struggles.
Our commercial loans page explains how these loans are structured, and our business loans page covers shorter-term options that can sit alongside a property loan.
Fixed or Variable Interest Rate on a Commercial Property Loan
A variable interest rate can move up or down over the loan, while a fixed interest rate stays the same for an agreed period. Fixing gives certainty for budgeting, but it can limit extra repayments and may involve break costs if you exit early.
Many borrowers split the loan so part is fixed and part is variable. The variable portion can offer features such as a redraw facility, which is only available if the lender provides it. The cost is that the variable portion's repayments can rise if rates increase. Ask about fees, features and break costs before choosing.
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What Do Repayments Look Like on a Manufacturing Facility Loan?
Repayments depend on the loan amount, the rate and the term, and interest-only periods lower early repayments but cost more later. The example below is illustrative only and uses a rate of 6.75% p.a.
Consider a manufacturer in Hawthorn who needs to borrow $1,200,000 to buy a facility. Cash flow is steady but the business is also buying new machinery, so the owner is weighing two structures.
Option one is principal and interest over 25 years. At 6.75% p.a. that is roughly $8,290 per month. Option two is interest-only for the first two years, then principal and interest. At 6.75% p.a., the interest-only repayments are $6,750 per month. That is about $1,540 less each month during those two years.
Once the interest-only period ends, the remaining term is 23 years, not 25. The repayment then rises to roughly $8,570 per month, about $280 more than option one. The owner decides the lower early repayments are worth it, because they free up money for the machinery during the first two years. They also plan for the higher repayment from day one, since the principal has not reduced in the meantime. Lenders may also price interest-only periods differently, and they are not offered on every commercial loan.
A lender or broker can run your own figures, and you can use a loan calculator to test different rates and terms.
Can You Finance Equipment Alongside the Property?
Yes, in many cases the property and the machinery are financed separately, with the equipment on its own facility. This keeps the property loan focused on the building and lets the equipment loan match the useful life of the machinery.
The trade-off is managing more than one set of repayments, and the equipment lender may take security over the machinery. Our equipment finance page outlines the options. If you are buying a facility that already contains plant and fixtures, ask what is included in the sale so the right assets are valued and financed.
Preparing Your Business Before You Apply
The strongest applications show up-to-date financials, a clear plan for the facility and a business credit score you have already reviewed. Checking your credit file early gives you time to correct errors and to explain any past defaults.
Speak to your accountant about how the purchase affects your business structure and tax position, since the way you hold the property can matter. A broker can then match your situation to lenders. We can also review your current debts through a loan health check so there are no surprises mid-application.
Our Hawthorn mortgage broker team can work through the numbers with you before you commit to a property.
Call one of our team or book an appointment at a time that works for you, and we will compare lender options for your manufacturing facility purchase.
Frequently Asked Questions
How do lenders assess a manufacturing facility loan?
Lenders review your business financial statements, your existing debts and whether your income can cover the repayments. They also value the property to confirm it is suitable security.
Is a secured or unsecured loan used to buy a factory?
A secured business loan is usually used, with the facility held as security. Unsecured loans generally suit smaller needs such as working capital.
What does an interest-only period do to repayments?
It lowers repayments at first, but they rise once principal and interest starts, because the remaining term is shorter. As an illustration at 6.75% p.a., a $1,200,000 loan costs $6,750 per month interest-only.
Can I finance machinery separately from the property?
In many cases, yes. A separate equipment facility can match the life of the machinery, but it adds another set of repayments to manage.
