Are you considering entering the world of caravan park ownership in Australia? Caravan Parks can be a fantastic business opportunity and a business that can be easy to operate with the potential for upside. However, before you embark on this journey, it’s crucial to understand the ins and outs of obtaining bank finance for your caravan park purchase. In our experience, this this should be the first step in your journey of buying a caravan park, and that is, to self-assess your ability to purchase the caravan park with the assistance of bank finance.
Understand the Difference: Freehold Going Concern vs. Leasehold
The first step in your caravan park financing journey is to understand the distinction between freehold going concern and leasehold businesses. In the freehold model, you own both the land and the business, while in the leasehold model, you own the business but lease the land from a landlord. Each has its advantages and disadvantages, so it’s vital to choose the right fit for your circumstances.
It is also important to note that the banks will have different Loan to Value Ratios (see below), where they will lend less against the leasehold business model and more against the Freehold Going Concern model. The basic reason for this is with the Freehold Going Concern model, the bank can take a charge over freehold land, whereas, with the leasehold business model, the charge is only against the lease and less secure.
Bank Lending Based on Valuation
Banks primarily base their lending decisions on the financial performance of the caravan park. They calculate an adjusted net profit to assess the caravan parks true profitability and thus your ability to service the loan.
Loan-to-Value Ratio (LVR) for Caravan Parks
Understanding the Loan-to-Value Ratio (LVR) for Caravan Parks is crucial. Banks typically lend up to 70% LVR for freehold going concern purchases and 50% for leasehold businesses. You might need to use equity from other assets to bridge the gap and effectively borrow 100%. Keep in mind that managing the serviceability of 100% debt can be more challenging for freehold businesses than a leasehold business, which typically, can comfortably service 100% debt.
Bank Requirements Vary for Caravan Park Businesses
Different banks have varying requirements for caravan park loans. It’s wise to work with a banker who specializes in the industry, as they will understand your specific needs and guide you through the process.
Banks will require an Independent Valuation for a Caravan Park Purchase
Banks typically require an independent valuation of the caravan park. They base their lending on this valuation, so its important to always make a contract of sale subject to bank loan approval.
Make Finance Approval a Contract Condition when buying a Caravan Park
When you’re ready to purchase a caravan park, include a special condition in your contract that makes finance approval a prerequisite. This protects you in case you can’t secure financing, allowing you to back out of the deal without penalties.
Seek Professional Advice
Don’t navigate this complex process alone. Seek guidance from experienced professionals, including accountants and lawyers with expertise in the caravan park industry. Their insights can help you make informed decisions and ensure a smooth transaction.
Credit History
Maintain a clean personal and business credit history, as this can significantly impact your loan application’s success.
Loan particulars when purchasing a Caravan Park
It is important to understand all the different loan particulars when buying a caravan park business. For instance, your interest rate, term of loan, length of loan, and if you will do interest only and for how long. A number of clients will seek to have their loan interest only for a two-year period, as typically the first few years in the caravan park, you are improving and it’s just good to have some breathing space and not have the immediate pressure of paying down principal.
Financial Projections for bank loan application
The bank may require forecast profit and loss and cash flow statements to support your application. This isn’t always the case, but if they do, then you’ll need the services of an accountant to prepare these to support your application.
Investing in a caravan park can be a rewarding venture, and securing bank finance is a critical step in making your dream a reality. By following these guidelines and seeking expert advice, you’ll be better equipped to navigate the financing process and position your caravan park business for success. It is likely in the future, that you will need to maintain a strong working relationship with the bank, as you look to improve or develop it with additional cabins or other facilities.
Remember, thorough preparation and a solid understanding of the financing landscape are key to achieving your caravan park ownership goals in Australia.