Lease bonds and bank guarantees: funding the security your landlord wants

You’ve found the space, agreed the rent and started getting quotes for the fit-out. Then the lease arrives with a clause asking for several months’ rent as security, due before you get the keys. For a new café, restaurant or shop, that can be a surprising amount of cash to tie up at exactly the moment every dollar is needed for the build. Here’s how lease security works and how owners fund it.

Cash bond or bank guarantee?

Landlords usually ask for security in one of two forms.

	Cash bond (security deposit)	Bank guarantee
What it is	Cash paid to and held by the landlord	A bank’s undertaking to pay the landlord up to a set amount
Where your money is	With the landlord or their agent	Usually held by or secured with your bank
Interest	In Victoria, landlords must hold deposits in an interest-bearing account, per the Small Business Commission	Depends on the arrangement with your bank
Costs	None beyond the cash tied up	Banks often charge establishment and ongoing fees
On exit	Returned if obligations met	Guarantee released and returned

Either way, the key point is the same: security is money you can’t spend on your fit-out, equipment or stock. The Victorian Small Business Commission notes a security deposit can also be provided as a bank guarantee, and that the amount is negotiated between landlord and tenant rather than set by retail leases legislation.

How much security will a landlord ask for?

There’s no single answer. It’s commonly expressed as a number of months’ rent, and it depends on:

• Your track record: an established operator with a trading history may get better terms.
• The fit-out: landlords may ask for more if the premises need significant works, or less if you’re investing heavily in improving them.
• The lease term: longer commitments can change the conversation.
• Personal guarantees: landlords often ask directors to guarantee the lease too.
• The market: in a strip with many vacancies, you have more negotiating room.

It’s always worth asking. The security clause is negotiable, and a smaller bond can free up cash for the fit-out.

Why a bank guarantee still ties up money

A bank guarantee can sound like a way to avoid putting up cash, but banks typically need the guarantee to be backed by something: a cash deposit held with the bank, or security such as property. So even with a guarantee, you’re committing resources. The advantage is that funds held with your bank may stay closer to you, and property-backed arrangements can avoid tying up cash altogether.

Funding lease security as part of your opening budget

The simplest approach is to treat the bond as one line in your total cost to open, alongside the fit-out, equipment, rent during the build, pre-opening wages and stock. Our fit-out cost estimator includes a bond line (as months of rent) and shows when each cost falls due.

Established businesses opening a new site can often use unsecured or cash-flow options, typically $5,000 to $500,000 and sized on turnover and bank statements. New ventures or larger projects usually use property-secured loans from $20,000 to $5,000,000, which can fund the bond along with the fit-out. If you’re not sure what’s realistic, make a quick enquiry; there’s no credit check when you first enquire.

Getting it back

When the lease ends and you’ve met your obligations, the security should come back. In Victoria, the Small Business Commission says landlords must return the deposit and any interest earned within 30 days of the lease ending if the tenant has met their obligations, and disputes can be referred to the Commission. Other states have their own rules and small business commissioners, so check yours. Make-good obligations, meaning restoring the premises as the lease requires, are usually the biggest factor in whether you get the full amount back.

An illustrative example

Illustrative only. A florist signing a five-year lease on a larger shop is asked for security equal to several months’ rent. She negotiates a slightly lower amount by committing to a quality fit-out and providing a personal guarantee. Rather than draining the fit-out budget, she includes the bond in a small property-secured facility that also covers a flower cool room and new counter, keeping her own cash for opening stock.

Questions to ask before you sign

• How much security, and in what form?
• Can the amount reduce after a period of good payment history?
• Who holds a cash bond, and does it earn interest?
• What are the make-good obligations at the end of the lease?
• What personal guarantees are required?

Our retail lease checklist covers these alongside rent reviews, outgoings, options and assignment, and restaurant fit-out finance looks at the rest of the opening budget.

Keep your fit-out cash for the fit-out

If a lease bond is about to swallow the money you need for the build, talk to us early. A short enquiry takes about 60 seconds and involves no credit check at the first step. Your details aren’t passed around a list of lenders; a real person looks at your new premises and your plans and calls you with options that fit. Please fill in the form accurately, including the total you need and any property you own, so we can match you properly first time.

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