Why commercial mortgages?

There are many different ways to finance your business, here we will discuss the commercial mortgage options available and how they are structured.

A commercial principal mortgage works much like a residential mortgage, however there are some differences that you should be aware of.

First, the interest rate will normally be a variable rate, calculated at a margin above the Bank of England base rate.

The mortgage term can be significantly shorter than your typical residential mortgage, with most commercial lenders offering terms from 1 to 30 years. This provides flexibility, if your business is generating cash flow this can help increase the assets on your balance sheet.

Typically, when looking to finance a commercial property, a lender will consider a number of factors, including:

How long has your business been in business?

The strength of your company’s balance sheet.

The amount of debt you have outstanding.

How much money you will need to generate to “break even”. Known as the “turnover break.” This is considered as if your business were to lose a number of customers, how much business do you need to write to pay your overhead?

Also, if you are too dependent on one client, that is, you generate more than 25-30% of your business turnover, then you may be in trouble if you lose this client.

If you are buying an investment property, meaning one that your business does not intend to be based on, this can add more questions to this list, including:

– What will be the expected rental income.

– What are the profiles of the companies that will rent you?

– What rental conditions the companies have committed to.

In addition, banks will normally expect an increase in “interest coverage”, that is, their yield will be greater than interest payments. This is normally expected to be in the region of 120%-190% depending on the lender you are speaking with.

Typically, the fees charged by commercial lenders will be higher than for a residential mortgage, including some lenders who charge an arrangement fee as well as an acceptance fee. These can vary from 0.5% to 1% each.

It is certainly possible to make a substantial amount of money from investing through commercial property, however you should consider these areas as a complete minimum before you begin.