How to Turn Your Commercial Real Estate Into Working Capital
For many companies, especially those in the small-to-medium-sized sector, securing enough capital to fund operations, expand, or manage unpredictable market conditions can be a significant challenge. One underutilised option for businesses to access much-needed liquidity is leveraging commercial real estate.
By turning your commercial property into working capital, you can secure a mortgage loan in Singapore, which offers a way to fund your business without having to part with valuable assets. Here’s how businesses can maximise the value of their commercial property and turn it into working capital for growth and stability.
Understanding Mortgage-Backed Working Capital Loans
A mortgage-backed working capital loan is a type of financing where you use your commercial real estate as collateral to secure a loan. These loans typically offer lower interest rates than unsecured business loans due to the property being used to guarantee repayment. In return, you can access a lump sum of money that can be used to meet urgent business needs, such as covering operating expenses, paying employees, purchasing inventory, or funding expansion.
Working capital loans backed by property are gaining popularity due to their attractive terms, especially when compared to traditional unsecured loans, which may come with higher rates or more stringent approval criteria. This makes them an ideal choice for businesses that own real estate and are looking for ways to unlock its value to fuel their growth.
Learn more: How a Working Capital Loan Can Help Businesses Survive an Economic Downturn
Step 1: Assessing the Value of Your Commercial Property
Before diving into a mortgage loan, it’s important to assess the value of your commercial property. Real estate, particularly commercial properties, can fluctuate in value depending on several factors, including location, market trends, and the condition of the property itself. Work with a professional appraiser to get an accurate valuation.
In addition to market value, consider how the property aligns with your long-term business goals. A well-maintained property in a prime location can be an excellent asset, but it’s essential to ensure that leveraging it won’t hurt your future plans for growth or sustainability.
Step 2: Choosing the Right Lender
When considering a mortgage loan for businesses, it’s crucial to choose a lender that understands your unique business needs. You’ll need to decide between a private lender for mortgage loans or a traditional bank. While banks may offer lower interest rates, private lenders often provide quicker approvals and more flexible terms, which can be critical for businesses in need of fast access to cash.
Private lenders have also become more popular for businesses seeking working capital loans as they tend to be more lenient on documentation requirements and offer faster turnaround times.
Step 3: Calculate Your Loan-to-Value Ratio
One of the key factors in determining how much you can borrow using your commercial real estate is the Loan-to-Value (LTV) ratio. The LTV ratio is calculated by dividing the loan amount by the appraised value of the property. A typical LTV ratio for mortgage loans is around 70%-80%, meaning you can borrow up to 80% of the property’s appraised value, depending on the lender.
The higher your LTV ratio, the larger the loan you can secure. However, keep in mind that a higher LTV ratio also comes with more risk for the lender, so they may impose stricter repayment terms or higher interest rates. Balancing a high LTV with manageable loan terms will ensure that your business can continue to thrive without stretching your financial resources too thin.
Step 4: The Benefits of Using Commercial Real Estate for Working Capital
Leveraging your commercial real estate can bring several benefits to your business. Here’s why it’s worth considering:
- Lower Interest Rates: Since the loan is secured by property, lenders tend to offer lower interest rates compared to unsecured loans. This means your business can secure affordable financing with less risk.
- Access to Large Sums of Capital: Real estate is a valuable asset, and with the right mortgage loan in Singapore, businesses can access large sums of capital to meet their operational or growth needs without depleting their cash reserves.
- Flexible Terms: Depending on the lender, mortgage-backed working capital loans can come with flexible repayment schedules and terms, allowing businesses to manage cash flow more effectively. This flexibility can be particularly useful during slow months or periods of financial uncertainty.
- Increased Liquidity: Converting your commercial property into a loan can help you maintain liquidity, ensuring that your business can continue operating smoothly even during periods of market volatility or economic downturn.
Step 5: Managing Risks and Ensuring Financial Stability
While leveraging your real estate for working capital offers many benefits, it’s essential to manage the associated risks. Defaulting on a mortgage loan can lead to the loss of the property, which is why it’s important to ensure that your business has the ability to repay the loan within the agreed timeframe. Having a clear repayment plan and building a cash buffer into your financial strategy can help reduce these risks.
Additionally, businesses should consider the potential impact of economic downturns, inflation, or recession on the value of their real estate. While commercial real estate tends to appreciate over time, external factors can affect property values, and market uncertainty can impact your ability to secure favourable loan terms in the future.
Learn more: Building an Emergency Fund: Why It’s Important for Businesses Even with a Loan
Making the Most of Your Real Estate Asset
Turning your commercial real estate into working capital through a mortgage loan in Singapore allows you to unlock the potential of your property to fuel growth, cover operating expenses, and navigate uncertain economic conditions.
Tembusu Financial Services is a private lender for mortgage loans, offering low interest rates and 100% transparency. We strive to help your business access the capital it needs without the stress of hidden fees or complicated terms.
Contact us today to learn more.
