Funding a commercial property deposit before the main loan is ready

Why is the deposit the hard part?

Buying commercial premises usually follows a familiar sequence: find the property, negotiate, exchange contracts and pay the deposit, then settle weeks later with the main loan. The problem is that the deposit is due at exchange — when the main loan may only be at the application stage. Good commercial properties attract competition, and sellers want a deposit before they take the property off the market.

A business with equity in existing property can solve this quickly by releasing some of it to fund the deposit.

Fast ways to fund the deposit

Option	How it works	Speed
Caveat loan	Short-term loan secured by caveat over existing property	$20k–$250k possible same day
Second mortgage	Loan behind your existing home or property loan	Same day possible for $20k–$250k
Bridging finance	Covers deposit and sometimes completion until a sale or refinance	Up to $5m possible within 24–48 hours
Business cash reserves	Simplest, but drains working capital	Immediate

Using cash reserves for a deposit can leave the business short of working capital just as it takes on new premises — not ideal timing. Equity release keeps the operating cash where it belongs.

Budget for more than the deposit

Purchase costs on commercial property can be substantial:

• Stamp duty or land transfer duty — calculated by each state. Victoria’s State Revenue Office, for example, publishes duty information and is transitioning certain commercial and industrial properties to an annual property tax regime.
• Legal and conveyancing fees
• Building and pest inspections
• Loan establishment costs on the main loan
• GST — depending on whether the sale is a going concern or taxable supply; get advice

Check your state revenue office for the duty that applies. A deposit funded on time is no help if the business can’t cover duty at settlement.

Plan the exit before you exchange

A deposit loan is only as good as the long-term finance that follows. Before exchanging:

1. Have the main purchase loan well advanced — ideally with formal approval.
2. Understand any finance conditions in the contract.
3. Know the settlement date, and allow a margin.
4. Plan how the deposit loan will be repaid — usually from the main loan at settlement, or from a later refinance.

If the long-term loan is slower than expected, bridging finance can complete the purchase on time while it’s finalised. Our page on how settlement works covers the steps.

An illustrative example

A printing business has rented the same factory for nine years and has the chance to buy a better-located warehouse for $1.85 million. The seller wants a 10% deposit — $185,000 — at exchange in five days. The bank has indicated support for the purchase loan but needs four weeks for approval. A caveat loan over the directors’ home funds the deposit the same day. At settlement, the bank loan completes the purchase and the caveat loan is repaid and withdrawn. (Illustrative only.)

Found the right premises? Tell us the exchange date.

Buying premises: a quick checklist

• Contract of sale and exchange date
• Status of the main purchase loan
• Details of property offered for the deposit loan
• Estimate of duty and purchase costs from your state revenue office
• Advice on ownership structure from your accountant

Using business or personal property for the deposit

There are two common sources of equity for a deposit:

• The business owners’ home. Often has the most equity, and a second mortgage leaves the home loan untouched. It does put personal property behind a business purchase, so think it through with your family and adviser.
• Existing business premises or an investment property. Keeps the family home out of the deal, if there’s enough equity.

Either way, the lender will look at the equity, the amount needed and the exit — which here is almost always the main purchase loan at settlement.

Going-concern sales and GST

Commercial property sales may be taxable supplies, input-taxed or GST-free as a going concern, depending on the property and the deal. The GST treatment affects how much cash you need at settlement. If the sale isn’t GST-free, the GST component can be substantial — even if it’s later claimed back — so plan for it in your settlement funds. Get advice from your accountant or conveyancer before signing.

Owning versus leasing: the cash flow view

Buying premises changes the shape of your costs. Rent disappears, but you take on loan repayments, rates, insurance, maintenance and possibly land tax or other state charges. Some owners find the total similar to rent, with the benefit of building equity. Others find the upfront costs and maintenance tighten working capital for a year or two. Run both scenarios through a cash flow forecast before you commit, and consider keeping a line of credit available during the first year of ownership.

Ready to secure the property?

When the right premises come up, timing decides who gets them. Asking what’s possible involves no credit check, and your enquiry isn’t shopped around a crowd of lenders — one specialist reviews your purchase and calls you back. Please give accurate details of the purchase price, exchange date and existing property, so we can tell you quickly whether the deposit can land in time. See if your business qualifies.