Why Should Pharmacy Owners Consider a Commercial Loan?

Buying Your Pharmacy Building Releases Capital You Can't Access as a Tenant

Owning the building your pharmacy operates from converts rent into equity and gives you control over lease terms, fit-out decisions, and exit timing. The loan structure you use determines how much working capital remains available for stock, staff, and unexpected expenses once settlement completes.

A pharmacy owner in Oakleigh looking to purchase their current premises needs to consider how the loan will be serviced from both rental income and business profit. Most lenders treating this as commercial lending will assess debt service coverage ratio across both income streams, which means your business financial statements and the property's rental yield both matter. The deposit requirement typically sits between 20% and 30%, depending on whether the pharmacy business and the property are held in the same entity or separated for tax and liability reasons.

Consider a pharmacist operating in the Oakleigh Central precinct who has been leasing for eight years. The landlord offers to sell the building for a price that reflects recent comparable sales along Drummond Street. The pharmacist holds $180,000 in savings and wants to know whether a secured business loan will leave enough liquidity to cover three months of stock rotation, which averages $95,000. The loan amount, after a 25% deposit, sits at roughly $540,000. Serviceability is tested against both the pharmacy's net profit and the notional rent the business would pay if it didn't own the premises. The lender accepts the combined income and approves the loan with a variable interest rate structure, leaving the pharmacist with $85,000 in accessible cash post-settlement. This outcome hinges on the pharmacy showing consistent cashflow over the previous two financial years and maintaining a business credit score above 600.

Secured Business Loans Offer Lower Rates But Tie Your Property to the Debt

A secured business loan uses the pharmacy building as collateral, which reduces the lender's risk and typically results in a lower interest rate compared to unsecured business finance. The trade-off is that the property becomes directly tied to your loan repayment performance.

Lenders will order a commercial valuation of the building, and the loan amount is calculated as a percentage of that valuation, usually capped at 70% to 80% loan-to-value ratio. If the pharmacy operates from a standalone building with strong tenant appeal or a mixed-use development near Eaton Mall, the lender may view it as lower risk and offer more flexible loan terms. If the building has limited alternative use or requires significant capital expenditure for compliance or fit-out, the lender may reduce the loan amount or increase the interest rate to offset perceived risk.

The interest rate structure matters when serviceability is marginal. A fixed interest rate locks in repayments for one to five years, which helps with cashflow forecast accuracy but removes access to redraw if you pay ahead. A variable interest rate keeps repayments responsive to rate movements and typically includes redraw, which allows you to pull back extra repayments if working capital tightens. In our experience, pharmacy owners purchasing their premises often split the loan, fixing a portion to protect against rate rises while keeping a variable portion for liquidity.

Separating the Property from the Business Can Unlock Better Loan Structure

Holding the pharmacy building in a separate entity from the pharmacy business allows you to treat the property as an investment asset and the business as an operating entity. This separation can improve your loan options and protect the building from business liabilities.

When the property is held separately, the loan application is assessed primarily on the rental income the building generates, rather than the pharmacy's trading performance. This means the lender applies a different serviceability test, typically requiring rental income to cover at least 120% of the loan repayment. If you're both the landlord and the tenant, you'll need a formal lease agreement between the two entities, and the rent must reflect market rates for the area. Lenders will compare your proposed rent against similar commercial properties along Eaton Street or Atherton Road to ensure it's defensible.

This structure also opens up the option to use a business line of credit or business overdraft for working capital, keeping those facilities separate from the property loan. If the pharmacy later requires equipment financing or needs to cover unexpected expenses, the property loan remains untouched and the business can access additional funding without refinancing the building.

Loan Amount and Deposit Requirements Reflect Building Use and Tenancy Strength

The deposit you need and the loan amount a lender will approve depend on whether the building is owner-occupied or tenanted, and whether the pharmacy is the sole occupant or one of several tenants.

For an owner-occupied pharmacy building, lenders typically require a 25% to 30% deposit. If the building includes additional tenancies, such as a medical centre or allied health services, the rental income from those tenants can be included in the serviceability assessment, which may reduce the deposit requirement or increase the loan amount. However, lenders will apply a vacancy factor, usually around 5% to 10%, to account for periods when tenancies turn over.

If the pharmacy is purchasing a building in the Huntingdale Road commercial strip where foot traffic and tenant demand are strong, the lender may view the asset as more marketable and approve a higher loan-to-value ratio. If the building is in a secondary location with limited parking or lower visibility, the lender may cap the loan amount at 65% of the valuation and require a larger deposit to proceed.

Serviceability Is Tested Against Both Business Profit and Rental Income

Lenders assess your ability to repay the loan by reviewing your business financial statements, cashflow forecast, and the rental income the property generates. The debt service coverage ratio must sit above 1.2, meaning your income needs to exceed the annual loan repayment by at least 20%.

For a pharmacy generating $320,000 in net profit and purchasing a building that would command $72,000 in annual rent if leased to a third party, the lender adds both figures when calculating serviceability. However, if the pharmacy is leasing the building from itself, the rent paid by the business is an expense that reduces net profit, so the lender adjusts the calculation to avoid double-counting. Your accountant should prepare the cashflow forecast to reflect this structure accurately, as errors in presentation can result in the application being declined or the loan amount reduced.

Your business credit score also plays a role. A score below 500 can limit your access to lenders offering competitive rates, while a score above 650 typically opens up a wider range of loan options and may reduce the interest rate by 0.5% to 1.0%. Late payments on trade accounts, outstanding tax debts, or previous defaults will pull the score down and may require explanation or remediation before proceeding.

Fixed or Variable Rate Structures Should Match Your Cashflow and Risk Tolerance

Choosing between a fixed interest rate and a variable interest rate depends on how predictable your pharmacy's income is and whether you value certainty over flexibility.

A fixed rate gives you the same repayment amount for the fixed period, which makes budgeting straightforward and protects you if rates rise. However, you lose access to redraw, and if you want to sell the building or refinance during the fixed term, you may face break costs. A variable rate adjusts with market movements, which means repayments can increase, but you retain access to redraw and can usually make extra repayments without penalty. If your pharmacy operates with strong cashflow and you expect to pay down the loan faster than the minimum term, a variable structure offers more control.

Some lenders offer flexible repayment options such as interest-only periods for the first one to three years, which reduces the repayment amount and preserves working capital during the early phase of ownership. This can be useful if you're also funding a fit-out or purchasing new equipment at the same time. After the interest-only period ends, repayments switch to principal and interest, and the loan term adjusts accordingly.

How Settlement Timing Affects Your Cashflow and Stock Holding

The gap between contract exchange and settlement determines how much working capital you need to hold in reserve and when you can finalise fit-out or tenancy arrangements.

Most commercial property transactions settle within 60 to 90 days, but if the vendor is also a tenant or if there are existing lease agreements in place, settlement may be delayed until those arrangements are resolved. During this period, your deposit is usually held in trust, but you'll need to keep additional funds accessible for settlement costs, including stamp duty, legal fees, valuation, and building inspections. For a pharmacy building purchase in Oakleigh, budget at least 5% to 6% of the purchase price for these costs on top of your deposit.

If you're also planning a fit-out or renovation after settlement, you may want to structure the loan with a progressive drawdown, where funds are released in stages as the work is completed. This keeps your loan balance lower during the construction phase and reduces the interest you pay before the building is fully operational. Not all lenders offer this option for commercial property, so it's worth confirming upfront if this flexibility is important to you.

Call one of our team or book an appointment at a time that works for you to discuss how a business loan can be structured around your pharmacy purchase and whether separating the property from the operating entity makes sense for your situation.

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