Thinking of buying a commercial property?
You’re probably wondering how to fund it. It’s a big step and can feel a bit daunting. But don’t worry we’ll break it down for you in simple terms.
Whether you’re a small business owner looking to buy your first office or an investor looking at a retail unit, funding your purchase is key.
So let’s get into commercial property finance.
Commercial Property Finance
What is commercial property finance?
In simple terms it’s the money you borrow to buy a property for business use. This could be an office block, a warehouse, a shop or a restaurant.
You might be thinking “Isn’t this just like getting a mortgage for a house?” Well yes and no.
While there are similarities, commercial property finance is a bit different. The amounts are often bigger and lenders are more cautious. They’ll want to know all about your business not just your personal finances.
In the UK the commercial property market has had its ups and downs recently. Brexit, the pandemic and changes in work patterns have all had an impact.
But don’t let that put you off – there’s always opportunities for the savvy buyer.
Assessing Your Finances
Before you start property hunting take a good look at your finances.
You’ll need to gather your business financials including profit and loss statements, balance sheets and cash flow projections. If numbers aren’t your thing don’t panic – this is where a good accountant can be really helpful.
Your personal finances will also be scrutinised.
Lenders will want to see your credit score and history. If your credit’s not perfect don’t worry – it’s not a deal breaker but it might affect the terms you’re offered.
Also take stock of your assets and liabilities. This includes any properties you already own, savings, investments and existing debts. The more information you can provide the better.
Before you approach any lenders talk to a specialist finance broker. They can help you get everything in order and might even spot opportunities or potential issues you hadn’t thought of.
Commercial Mortgages
Now let’s get on to commercial mortgages. These come in a few guises:
Owner-Occupied Commercial Mortgages
This is what you’d go for if you’re buying a property for your business to use.
Let’s say you run a successful bakery and you want to buy the building you’ve been renting. An owner-occupied mortgage could be the answer.
You can typically borrow up to 70-75% of the property value with this type of mortgage. Rates vary but are generally a bit higher than residential mortgages. You might be looking at terms of 15-25 years.
To qualify lenders will want to see your business is in good shape and can afford the repayments. They’ll look at your trading history, profitability and future projections.
Commercial Investment Mortgages
If you’re buying a property to rent out to other businesses this is the route you’d take. Commercial investment mortgages are similar to buy-to-let in the residential world but with some key differences.
Lenders will be very interested in your tenant.
They’ll want to know who’s renting the property, what kind of business they run and how long the lease is. A well established company on a 10 year lease will look a lot more attractive than a start up on a short term agreement.
Loan to value ratios are typically 65-75% and rates are a bit higher than owner-occupied mortgages. The rental income will need to cover the mortgage payments with some margin – usually about 125-130% of the monthly payment.
Semi-Commercial Mortgages
These are for properties that are part commercial part residential – think of a shop with a flat above it.
They can be a bit harder to finance but are popular with lenders (and investors) because they spread the risk.
You might find it easier to get finance for a semi-commercial property than a purely commercial one, especially if you’re new to property investing. Lenders see them as less risky because even if the commercial part struggles there’s still rental income from the residential bit.
Alternative Finance Methods
Commercial mortgages are the most common way to finance a property purchase but they’re not the only option.
Let’s look at some alternatives:
Bridging Loans
These are short term loans designed to provide money to cover a temporary funding gap. They’re often used when you need to move quickly – for example if you’re buying a property at auction.
Bridging loans last 3-12 months and come with higher interest rates than traditional mortgages. But they can be arranged quickly – sometimes in as little as a few days.
The catch?
You need a clear ‘exit strategy’ – that is, a plan for how you’ll pay off the loan. This could be by selling another property or by refinancing onto a longer term mortgage.
Commercial Bridging loans are commonly used to acquire property quickly, possibly to beat another interested party. You then apply for a long-term commercial mortgage to repay the bridge.
Commercial Property Development Finance
If you’re planning to build or significantly renovate a property this might be the option for you.
Development finance is released in stages as the project progresses which helps manage risk for both you and the lender.
The UK has a busy development finance market with options for projects of all sizes. You might be able to borrow up to 70% of the gross development value with interest rolled up and paid at the end of the project.
Asset Based Lending
Using your existing assets as security for a loan.
It could be property, equipment or even unpaid invoices. It’s a good option if you have valuable assets but maybe don’t meet the criteria for a traditional mortgage.
Asset based lending has been growing in popularity especially among businesses that struggle to get finance through other routes.
Key Factors
When you’re looking at commercial property finance there are a few key factors that will affect the deal you’re offered:
Loan-to-Value (LTV) Ratio: This is the percentage of the property value you can borrow. In the UK it’s typically 65-75% for commercial properties.
Interest Rates: These can be fixed or variable. They’re a bit higher than residential mortgage rates and will depend on the risk of the loan.
Repayment Terms: You might get an interest only deal or a capital repayment mortgage. Terms are usually 15-25 years.
Fees: Don’t forget to add in arrangement fees, valuation fees, stamp duty and legal fees. These can add up to a lot.
Personal Guarantees: For smaller businesses or first time commercial buyers, lenders may ask for a personal guarantee. This means you’re personally liable if the business can’t repay the loan. Not a decision to be taken lightly. For this you may want to consider personal guarantee insurance, to reduce your risk.
Choosing the Right Lender
You’ve got quite a few options when it comes to commercial property finance.
There are the high street banks, specialist lenders, challenger banks and even some private equity firms getting in on the action.
Each type of lender has its own strengths.
High street banks might offer competitive rates but tend to be quite conservative in their lending criteria. Specialist lenders might be more flexible but could charge higher rates. Challenger banks often have a more tech savvy approach which can speed up the process.
This is where a good commercial finance broker can be really helpful. They’ll know the market inside out and can help match you with the right lender for your specific needs.
Benefits of Using a Broker
When it comes to commercial property finance, working with a broker can make a world of difference.
For starters, brokers have relationships with a wide range of lenders, including specialist and niche providers you might not find on the high street.
This means more options and potentially better deals for you.
Searching for the right finance option can be time-consuming, but a broker does the legwork for you, allowing you to focus on running your business.
They understand the market inside out and can explain your options in plain English, cutting through the complexity of commercial property finance.
Every business is unique, and a good broker will take the time to understand your specific needs and find a finance solution that fits.
They can help you prepare a strong application, increasing your chances of approval. Brokers know what lenders are looking for and how to present your case in the best light.
Thanks to their industry connections and negotiating power, brokers can often secure more competitive rates than you might get on your own.
And their service doesn’t end once you’ve secured your finance. They can provide ongoing advice and support, helping you navigate any challenges that arise.
Remember, while there might be a fee for using a broker, the benefits generally outweigh the cost.
When you’re making a significant investment in commercial property, having an expert in your corner can be invaluable. Their expertise and market access can save you time, money, and stress in the long run.
