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What is commercial property?
There are three main categories of commercial property:
Industrial use
Industrial units, factories, warehouses and agricultural property.
Leisure/retail
Shopping centres, supermarkets, retail warehouses, high street shops, car showrooms, pubs and restaurants.
Office
Offices constructed for this purpose including additional amenities and services such as parking etc.
Why would you use commercial property finance?
There are several reasons why commercial property finance – loans secured on property that is not your residence – could be right for your small business.
Your company might have plans to expand and your current commercial premises may be too small for a larger workforce. Perhaps you have a growing business and you’ve reached the stage where proper office space is required.
The big question is whether to rent or buy a new premises.
Owning your workspace gives you greater control than renting as it means you can use it for other things, such as letting surplus space. And any money you spend on the building improves your company’s asset, rather than a landlord’s.
Owning your premises also makes for a stronger balance sheet and creates a perception of a stable business. And if property values go up, you benefit.
There are obviously downsides to owning property, such as responsibility for upkeep, potential loss if property values drop and tied-up capital.
But if your business is in the market to buy a building then commercial property finance will be of interest.
How does commercial property finance work?
Few small to medium-sized businesses can pay cash when buying a property. They need to borrow a percentage of the cost via a commercial property mortgage.
The main difference between a commercial and residential mortgage is that a larger deposit is required. For owner-occupied commercial property, businesses can borrow 70-75 per cent of the value. The percentage that can be borrowed will be lower for an investment and determined by rental income. The amount that can be borrowed could fall further if you are buying a business that includes property.
Repayment terms for business mortgages vary from five years to 30. Shorter-term options – bridging loans or property development loans – are also available. These can range from a few weeks to a couple of years.
Most commercial mortgage rates are variable, with a rate often quoted as a percentage above the Bank of England base rate or LIBOR (the rate used for interbank lending in London). However, commercial property finance often has lower rates than other kinds of finance and loan interest that is tax deductible.
Some commercial mortgage lenders offer a fixed commercial mortgage rate for some or all of the term, which is advantageous for the borrower as the lender takes on more of the rate risk.
What are the costs of commercial property finance?
As with mortgages, there are upfront costs to pay before the financing can be secured. As mentioned above, a commercial property mortgage requires a deposit of 25 per cent at the very least.
There are also arrangement fees, which are usually added to the loan when it completes and are typically one to two per cent of the loan amount for loans up to £1 million. Then there are valuation fees to cover a valuation report for the lender. These fees start at around £500 but can be considerably higher.
As with any property transactions, legal expertise is essential, with the buyer responsible for their own legal fees and those of the lender. The cost depends on the complexity of the transaction.
For businesses that use a specialist commercial mortgage broker to secure the best deal, there will be a fee for these services of up to one per cent of the loan value.
A commercial mortgage calculator can give you an idea of the likely upfront and monthly costs of a commercial property mortgage.
How long does it take to secure commercial property finance?
Short-term finance, like a bridging loan, can be arranged in as little as 72 hours, but for a commercial property mortgage, expect a timescale similar to a residential mortgage.
To ensure the lender is happy, the valuation of the property, background checks on the borrower (potentially including your business plan, three years of audited accounts, up-to-date management accounts, and projected trading and loss account/balance sheet) and the legal processes all need to be completed. A broker may speed-up the process, but there is only so much they will be able to do.
As with a residential mortgage, funds are only released once the purchase of the property has been completed. With the amount of paperwork and number of stages to be completed, several months is a realistic expectation.
What type of security do I need for commercial property finance?
The main security is the property being purchased and the cash deposit. If your business doesn’t have sufficient cash, you can offer additional security in the form of other property your business holds a significant amount of equity in, or a charge over other assets, such as an insurance policy or shares.
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