This is an introduction to commercial mortgages to help you understand what you need to do to successfully get a commercial mortgage for your business.
The principles are the same whether you are a sole trader or limited company. However it is worth bearing in mind that most limited companies have multiple directors, so as you will see, this can make a difference to the banks.
The present economic uncertainties combined with restricted availability of capital for commercial mortgages means that it is likely that potential borrowers will have to carry out quite a lot of research in to business financing.
Commercial mortgages can be used to buy new business premises or to buy an existing business in its entirety. Lenders generally require a deposit of around 25%-40% of the total value. Mortgage terms can run from 1 year, up to around 30 years.
Despite the UK government’s u-turn on residential buy to let properties being held in SIPPs some people are optimistic that the market will grow further as commercial mortgages become more mainstream. Any improvement to the wider economy will greatly help investors looking to expand their portfolio into the commercial property sector.
Using A Commercial Mortgage Broker
Using a mortgage broker who is expert in arranging commercial mortgages can make a significant difference. In addition to commercial mortgages most commercial finance brokers will deal in bridging loans, development finance and secured loans.
You can use a commercial mortgage broker at the same time as approaching your bank directly, but watch out for how many credit checks are being carried out. Commercial mortgages and the activities of brokers are almost completely unregulated so looking out for membership of a trade association is a good precaution. The National Association of Commercial Finance Brokers attempts to regulate the activities of its members, so is a good place to start.
Frequently, the mortgage is supplemented by a personal guarantee from the owner(s), which makes the debt payable in full even if the business folds or the property is repossessed. The lender can also call on the collateral if they think the security will not satisfy the outstanding balance. A limited company with 3 or 4 directors all providing guarantees is going to be a much more attractive proposition to a lender than a one-man-band.
Rates and Loan-to-Values for Commercial Mortgages
The exact loan-to-value you receive for your commercial loan will depend on the lender and the strength of your proposition. Many commercial lenders consider the type of business they are providing the loan for as well as the condition of the property. The rates charged by different lenders can vary tremendously.
A good solid business with a proven track record, buying a property in good condition should be able to negotiate very favorable terms from a choice of lenders. However, if any of these factors are lacking then the rates can start climbing steeply. Another good reason why using a commercial mortgage broker is a good idea.