Key takeaways
- Match the term to the asset: A building lasts decades and suits a long amortisation. A business loan runs 1 to 5 years, which is the wrong shape for property.
- Security changes everything: A commercial mortgage is secured on the property, which buys you a longer term and a lower rate than general business lending.
- The reverse trap is worse: Funding stock, wages or a tax bill by drawing on property equity ties a short-term problem to a long-term security.
- Deposit is the trade-off: Property finance needs 20% to 35% down, where a business loan may need none, which is why the cheaper option is not always the available one.
- Most premises purchases need both: The mortgage buys the building, and separate facilities fund the fitout, the equipment and the working capital the move consumes.
When a business decides to stop renting, the finance question usually arrives framed as a choice: do we take a commercial mortgage or just use a business loan? Put that way it sounds like a preference. It is not. The two products are built for different jobs, and choosing the wrong one is one of the more expensive structural mistakes an owner can make, because it is difficult to unwind once settled.
Why the choice matters more now
There were 2,729,648 actively trading businesses in Australia at 30 June 2025, according to the Australian Bureau of Statistics, and the overwhelming majority lease their premises. For many, rent is the second largest line after wages, and it rises every year without building anything.
Borrowing costs are also less forgiving than they were. The Reserve Bank left the cash rate target at 4.35% in June 2026 after three increases earlier in the year, noting that financial conditions have tightened. When money costs more, the gap between a well-structured 20-year facility and a badly structured 3-year one widens quickly.
The two products side by side
| Consideration | Commercial mortgage | Business loan |
|---|---|---|
| What it funds | Purchase or refinance of premises | Stock, equipment, expansion, working capital |
| Security | The property itself | Often unsecured or against business assets |
| Typical term | 15 to 30 years | 3 months to 5 years |
| Deposit | 20% to 35% of valuation | Usually none |
| Speed | Weeks, with valuation and due diligence | Often days |
| Assessed on | The asset and business serviceability | Revenue and trading history |
The rule that settles it: match the term to the life of the asset
A warehouse will still be earning its keep in 25 years. Repaying it over 3 leaves repayments no trading business can carry, which is why nobody actually does it. What happens instead is refinancing every few years, with fresh fees, fresh valuations and the risk that appetite has changed by the time you need to roll it over. A mortgage removes that cycle by amortising the debt across a period that matches how long you will hold the building.
The reverse error is more common and less visible. A business needs $150,000 for stock or a tax bill, has equity in its premises, and draws on the mortgage because the rate is lower. It works, briefly. But a seasonal stock need has been converted into 20 years of debt secured against the building the business operates from, and the equity that could have supported the next purchase is gone. Short-term needs belong on short-term facilities: cash flow finance costs more per month and far less over the life of the need.
What a premises purchase actually requires
Most buyers underestimate how much sits outside the mortgage:
- The deposit and costs: 20% to 35% of valuation, plus stamp duty, legal and due diligence, commonly another 5% to 8% of the price.
- GST at settlement: Commercial premises generally attract GST. The ATO confirms a GST-registered buyer can claim it where the property is used in the business, but you fund it first and claim it later.
- The fitout: Rarely covered by the mortgage. Retail fitout finance and its office and hospitality equivalents fund the works separately, with staged drawdowns to the builder.
- A trading buffer: Relocations consume cash. Budget for downtime, duplicate rent and the fortnight nobody is fully productive.
A realistic scenario
A specialist retailer in suburban Adelaide has paid rent for eleven years and finds a shopfront at $950,000. The temptation is to fund as much as possible through fast, unsecured business lending, because the deposit is the obstacle and unsecured money needs none.
The structure that works splits the job. A commercial mortgage at 70% covers $665,000 over 20 years, secured on the shop. The $285,000 deposit and costs come from savings plus equity offered as additional security. The $120,000 fitout sits on its own facility matched to the works, and a modest revolving limit covers the trading dip during the changeover. Three facilities, each with a term that fits what it funds. Had the whole project been forced through short-term business lending, the repayments would have consumed the margin the move was meant to protect.
Frequently asked questions
Can I buy premises with a business loan instead of a mortgage?
In principle you can borrow and spend the money on anything, but the terms make it impractical. A business loan over 1 to 5 years produces repayments a property purchase cannot support, so you would be refinancing continually. For a long-term asset, a facility amortised over 15 to 30 years is the appropriate structure.
Is a commercial mortgage always cheaper?
Per dollar borrowed it is generally cheaper, because it is secured against property. It also takes longer to arrange, needs a substantial deposit, and puts the premises at risk if the business cannot service it. Cheaper is not the same as better suited, and for a short-term need it is clearly not.
Should I use property equity to fund working capital?
It is usually worth avoiding. Equity is finite and slow to rebuild, and once it is committed you lose the flexibility to use it for the next opportunity. Fund recurring or short-term needs on facilities designed for them, and keep property equity for property.
What matters most
Do not treat this as a choice between two ways of borrowing the same money. Ask how long the thing you are buying will last, then match the term of the debt to it. Property goes on a mortgage, fitout goes on a fitout facility, and stock and wages go on revolving finance. Structured that way, each facility is priced against security that fits it and no short-term problem ends up attached to your building. Getting that structure right at settlement is far easier than restructuring it three years later.
This article is general information only and does not take your circumstances into account. Speak with your accountant or a licensed adviser before making a finance decision.
Planning a premises purchase and working out how the pieces should be funded? Compare business finance structures across 50 or more lenders here.