Commercial loan terms determine how much capital you can access, how you repay it, and what flexibility you retain as your business evolves.
If you're comparing lenders or weighing up whether to refinance, the structure of your loan matters as much as the rate. A 25-year principal and interest facility with a five-year fixed period and monthly repayments will behave very differently to a three-year interest-only term with quarterly reviews and a revolving credit option. Both might be called a commercial property loan, but the way they support or constrain your business depends entirely on how the terms are written.
What Defines a Commercial Loan Term
A commercial loan term is the set of conditions that govern how the loan operates. It includes the loan amount, the length of the facility, whether repayments are principal and interest or interest-only, the security required, and any provisions for redraw, early repayment, or progressive drawdown.
These conditions are negotiated between you and the lender, and they're rarely identical across products. A secured commercial loan backed by an office building in North Sydney will typically offer a longer term and lower rate than an unsecured facility, but it also locks that property as collateral. A development finance facility might include progressive drawdown tied to construction milestones, while a standard commercial property loan disburses the full amount at settlement.
Loan Amount and LVR
The loan amount is determined by the lender's assessment of serviceability and the security you provide. Most lenders cap commercial LVR at 70% to 80% of the property's valuation, though this varies depending on the asset type and your financial position.
Consider a company director purchasing a warehouse in Wetherill Park. The property is valued at $1.8 million. With a commercial LVR of 70%, the maximum loan amount would be $1.26 million, requiring $540,000 in equity or cash. If the director also operates a retail business and can demonstrate strong cash flow, some lenders may extend the LVR to 75%, reducing the deposit required. The difference between 70% and 75% LVR is $90,000 in upfront capital, which for many businesses is the margin between proceeding and delaying the purchase.
When you're structuring a commercial loan, the LVR directly affects your borrowing capacity and the amount of working capital you need to retain.
Interest Rate Structure and Flexibility
Commercial interest rates are offered as variable or fixed, and in some cases as a split between the two. A variable interest rate moves with the market, which means repayments fluctuate but you retain the ability to make extra payments or exit the loan without penalty. A fixed interest rate locks your repayments for a set period, typically one to five years, which provides certainty but restricts flexibility.
The challenge is that fixed terms often come with break costs if you repay early or refinance before the term ends. If you're holding commercial property in a high-turnover precinct or planning to expand within a few years, locking in a five-year fixed rate may not align with your strategy. Variable rates, by contrast, allow you to take advantage of redraw facilities and make lump sum repayments without penalty, which is useful if your business generates uneven cash flow or you receive periodic capital injections.
Principal and Interest vs Interest-Only Repayments
Principal and interest repayments reduce the loan balance over time, which builds equity and lowers risk. Interest-only repayments keep the loan balance unchanged, but reduce the monthly outgoing, which can be critical in the early years of a commercial property investment or during a business expansion phase.
Most lenders offer interest-only terms for one to five years on commercial property finance, after which the loan reverts to principal and interest. If you're acquiring an industrial property and leasing it to a tenant, the rental income might cover interest-only repayments but fall short once principal repayments begin. Planning for that transition is part of structuring the loan correctly from the outset.
In a scenario where a director is buying a strata title commercial unit in Parramatta and leasing it back to their own company, interest-only repayments in the first three years allow the business to allocate more cash flow toward upgrading existing equipment or expanding operations. After that period, the loan reverts to principal and interest, but by then the company's revenue has increased and the higher repayment is manageable.
Security: Secured vs Unsecured Commercial Loans
A secured commercial loan is backed by property or another asset, which reduces the lender's risk and typically results in a lower rate and higher loan amount. An unsecured commercial loan does not require property as collateral, but the rate is higher and the loan amount is usually capped at a lower threshold.
Most commercial property loans are secured against the asset being purchased. If you're buying commercial land or an office building, the property itself becomes the security. Some lenders will also accept residential property as additional security, which can increase the loan amount or improve the rate, though this introduces cross-collateralisation and should be considered carefully.
Unsecured facilities are more common for working capital or equipment purchases. If you're upgrading existing equipment or buying new equipment for a service-based business, and you don't want to tie up property, an unsecured option might be appropriate. The trade-off is a higher rate and a shorter term, typically one to three years.
Loan Term Length and Repayment Structure
Commercial loan terms typically range from one to 30 years, though the majority sit between five and 15 years. The term you choose affects your repayment amount, total interest cost, and the flexibility you have to refinance or sell.
A longer term reduces the monthly repayment but increases the total interest paid over the life of the loan. A shorter term increases the monthly outgoing but builds equity faster and reduces interest cost. The right term depends on your business's cash flow, growth plans, and the intended use of the property.
If you're using construction loans or commercial development finance, the term is often split into two phases: a construction phase with interest-only payments and progressive drawdown, followed by a repayment phase once the project is complete. This structure aligns repayments with income generation, which is critical when the property isn't producing revenue during construction.
Redraw, Offset, and Revolving Credit Options
Some commercial loans include a redraw facility, which allows you to access any extra repayments you've made. This is useful if your business experiences seasonal cash flow or you want to reduce interest without permanently locking funds into the loan.
Other lenders offer a revolving line of credit, which functions like a business overdraft linked to your commercial property. You can draw down and repay within an approved limit, and interest is charged only on the amount you're using at any given time. This structure suits businesses with irregular income or those managing multiple projects simultaneously.
Offset accounts are less common in commercial finance than in residential lending, but some lenders do offer them. An offset account reduces the interest charged by offsetting your account balance against the loan balance, which can provide significant savings without locking the funds away.
Pre-Settlement Finance and Progressive Drawdown
Pre-settlement finance allows you to access funds before settlement, which can be necessary if you're coordinating the sale of one property with the purchase of another. This is more common in commercial bridging finance scenarios, where timing is tight and you need capital to secure the new asset before the existing one sells.
Progressive drawdown is standard in commercial construction loans and development finance. Instead of receiving the full loan amount at settlement, funds are released in stages as the project reaches agreed milestones. This reduces interest costs during construction and aligns disbursements with your actual spending.
If you're building a warehouse or developing a retail property, progressive drawdown means you're not paying interest on the full loan amount from day one. You draw down the first tranche at land acquisition, the next at slab stage, and so on until practical completion. The structure mirrors the cash flow demands of the project.
Refinancing and Exit Flexibility
Commercial refinance is common as businesses grow, interest rates shift, or better loan structures become available. The ease with which you can refinance depends on the terms of your existing loan, particularly whether it's fixed or variable, and whether there are exit fees or break costs.
If your current loan is on a variable rate with no exit penalties, refinancing is straightforward. If it's fixed, you'll need to weigh the cost of exiting against the benefit of the new facility. Some lenders allow partial refinancing or rate switches without full discharge, which can provide some of the benefit without incurring the full break cost.
When considering refinancing, the decision should be based on whether the new structure delivers material improvement in repayments, flexibility, or loan features. Refinancing for a rate reduction of 0.1% might not justify the costs, but refinancing to move from interest-only to principal and interest, or to release equity for expansion, often does.
Call one of our team or book an appointment at a time that works for you. We work with lenders across Australia to structure commercial facilities that align with how your business operates and where it's heading.
Frequently Asked Questions
What is the typical LVR for a commercial property loan in Australia?
Most lenders cap commercial LVR at 70% to 80% of the property's valuation, depending on the asset type and your financial position. The LVR determines how much deposit you need and how much you can borrow.
What is the difference between a secured and unsecured commercial loan?
A secured commercial loan is backed by property or another asset, which typically results in a lower rate and higher loan amount. An unsecured loan does not require collateral but comes with a higher rate and lower borrowing limit.
Can I make extra repayments on a commercial loan?
On a variable rate commercial loan, you can usually make extra repayments without penalty and may access those funds through a redraw facility. Fixed rate loans often restrict extra repayments and may charge break costs if you repay early.
What is progressive drawdown in a commercial construction loan?
Progressive drawdown releases the loan amount in stages as your construction project reaches agreed milestones, rather than providing the full amount at settlement. This reduces interest costs during the build and aligns funding with your actual spending.
How long is a typical commercial loan term?
Commercial loan terms typically range from one to 30 years, with most falling between five and 15 years. The term you choose affects your repayment amount, total interest cost, and flexibility to refinance or sell.
