Applying for a commercial loan in South Africa

If you're buying industrial or commercial property for investment purposes, you will most probably go through a bank to secure a loan to buy the property. Even those who have enough money for a "cash buy" opt for financing as this may increase their returns due to the concept of gearing. 

If this process is new to you or if you are unsure about certain aspects, read on as we will discuss the process of applying for a commercial loan in the South African context.

Important Documents

Business plan, proposal and financial details

Generally, the loans that get approved without much hassle are the ones that have a good solid application. This needs to include a comprehensive business plan and convincing proposal that explains the reasons the bank should approve the required loan amount. Your proposal needs to reflect a good understanding of the property you plan on buying and proof that you will be able to pay off the loan diligently. For the latter, the bank may require financial details for any additional income sources like salaries, other businesses, or investments.

Income and expense analysis

If the property already generates an income from tenants, then the bank will require an income and expense analysis. This is known as a tenant or rental schedule and it should reflect the details of existing tenants and the income and expenses generated by the property. This information is used by the bank to determine whether the proposed bond instalments can be covered by the net income of the property. Ultimately, you will need to convince the bank that the property is a sound investment and their funds will be used wisely. 

FICA details, ID documents and proof of residence

Besides your financial details, tenant schedule, and business plan and proposal, you will also need to submit FICA details of all parties involved in the purchase. This will include the name and registration number of the legal entity or individual that the property will be registered under as well as the personal details, ID documents and proof of residence of any directors, members and shareholders. After submission, bond approval can take up to 3 weeks.

Costs to Consider 

Administration and VAT fees

There are a number of costs to budget for when applying for a commercial loan from the bank, including administration and VAT fees. You will also need to budget for associated legal fees such as transferring attorneys. Considering the number of costs involved, it's vital to get the exact amount you will be paying in order to manage the costs effectively. 

Tip: Ask the bank whether the admin and VAT fees are included in the loan amount or whether it is payable separately. 

Deposit 

Another amount you will need to budget for is the deposit - the exact amount will depend on the bank that has granted you the loan. However, in general, banks require a far greater deposit from commercial purchasers and seldom grant bonds over 65% - 70% of the total purchase price. 

Repayments

Most banks expect commercial loans to be paid off relatively faster as it is considered an income-generating asset. This is typically a 10 year period, however, the exact time depends on whether it is a buy-to-let investment or if you will be occupying it. If it's the latter, then banks may consider extending this over 12 or 15 years. 

Bond Originators

A growing number of businesses are turning to commercial bond originators to help them through the entire application process. The role of originators is to offer advice, guidance and tailored services in commercial property financing. They do the heavy lifting for you by approaching various banks on your behalf and they help negotiate better interest rates on your home loan amount.