Deciding on the right form of financing could make a significant difference to your business goals.
Here we run through the pros and cons of commercial mortgages. The first step to deciding the right form of financing is to understand all of the different commercial borrowing products available on the market.
Each option will have different costs, advantages, and disadvantages, so you should consider:
How much do you need to borrow?
What premises do you want to buy?
If you have a deposit or assets to leverage
Options include remortgaging existing properties, business loans, owner-occupier mortgages, and commercial Buy to Let lending.
The Following Topics Are Covered
Advantages and Disadvantages of an Owner-Occupier Business Mortgage?
What is the Difference Between Renting Business Premises and an Owner-Occupier Mortgage?
There are several pros and cons between renting a property for your business and buying a property through an owner-occupier mortgage.
Advantages of Choosing an Owner-Occupier Business Mortgage:
Your monthly mortgage repayments are likely to be very similar to the monthly rent you would expect to pay.
There is stability in budgeting for monthly repayments, without accounting for potential rent rises.
The business may sublet additional space to generate rent to contribute to the mortgage repayments, subject to lender permission.
Companies have control over how they use the space, including making changes and extensions to allow for business growth as an alternative to relocating.
The interest paid on the mortgage is tax-deductible.
As the property grows in value, so too does your business equity and capital balance.
Disadvantages of Business Mortgages vs Renting a Property:
You will need somewhere between 25% to 40% deposit.
Relocations can be more complicated since you'll need to sell a property, which is likely to take much longer than ending a rental agreement.
The business will need to cover all the building repairs and maintenance costs.
If the property market dips, your building may decrease in value.
Is A Business Loan Better than a Commercial Mortgage?
Depending on your circumstances and what you wish to borrow, you might decide on a business loan as an alternative to a commercial mortgage.
Business loans are usually cost-effective if you only need to borrow a proportion of the purchase cost.
Examples, of where this might be the right choice, include:
You need to borrow under £25,000. Generally, if you need less than £50,000, a business mortgage isn't the most viable option given the minimum lending caps and the costs of taking out a mortgage.
You are happy to borrow through an unsecured loan. Commercial mortgages require security in the form of equity or another asset, whereas business loans do not.
You expect to pay back the loan in three years or less. In this case, a bridging loan might be a good option provided you have a repayment vehicle in place as an exit strategy.
Which Is More Expensive: Commercial Mortgage or an Unsecured Business Loan?
It really depends on how much you want to borrow, and how long for. Secured business loans are another option, whereby you use an asset or property as security, and therefore can borrow over and above the usual £25,000 maximum.
However, business loans are generally not cheaper than a commercial mortgage for higher amounts of borrowing, as the interest rates of often steeper.
Pros And Cons of Remortgaging or Taking out a Commercial Loan
Another scenario exists where you have an existing commercial mortgage, and want to raise more capital. You could remortgage the existing mortgage, or take out a business loan if you're happy with unsecured borrowing rates, and need £25,000 or less.
Each option depends on the timescales and amount you need to borrow, and a professional commercial lending broker can help you identify the most cost-effective option.
Lenders will look at several factors when deciding whether to accept an application, such as:
Is A Buy to Let Or A Commercial Mortgage Best for My Business?
Professional landlords and investors need to choose between residential Buy to Let Mortgage and Commercial Mortgages - and the deciding factor is who your tenants will be.
If you expect to let your property to Residential tenants, then a Buy to Let Mortgage is arguably the right option.
However, if the premises will be leased to businesses, then a commercial mortgage is the correct choice.
How Do Interest Rates Compare Between Commercial and Residential Properties?
Typically, the rates charged on a commercial mortgage will be higher than one taken on a residential property.
However, these are very different products, with commercial lending being a bespoke product tailored to the organisation, and with a different risk assessment process.
In residential Buy To Let mortgages, lenders usually have fixed published interest rates, and make an offer depending on the risk profile of the applicant and company.
Why Are Commercial Properties More Expensive to Finance Than Residential Properties?
In short, commercial lending is more expensive because it carries a higher risk profile.
The interest rate offered depends on the risk perceived by the lender, which they calculate based on the below criteria:
What LTV ratio you are borrowing at? Most commercial lenders require a deposit of 25-40%, and the higher the deposit and lower the Loan to Value ratio, the better the rate the lender can offer.
Your business credit history. Lenders will consider your credit file, as well as those of the primary owners or directors of the company.
Trading experience of the organisation. The longer you have been trading, and the more extensive a track record you can demonstrate, the less risky the application.
How profitable the business is. Lenders will look at your business profits in detail, to assess whether you can afford to keep up with the commercial mortgage repayments
The articles are intended to provide a general understanding of the topic. The contents should not be treated as advice. Please note Accelerated Finance only considers applications for commercial or investment properties.
Your property may be repossessed if you do not keep up repayments on the finance secured against it.