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How to secure a commercial mortgage for business premises

How to secure a business property loan and important factors to be aware of

Commercial mortgages might not be easy to come by during a credit crunch, but that's not to say they're impossible. With reduced property values you might find that a recession is actually the best time to make the switch from leasing to buying. As with any property purchase, you need to think of it as a long term investment.

You also need to consider whether it's a building you can stick with long-term. The advantage of leasing is the obvious flexibility that goes with it. As a new or small business, you may find that your requirements for space are constantly changing so it's important to be sure you're not buying a property that won't fit your needs in a year's time.

However, if you are in a position to buy then there are obvious advantages. Firstly, you won't be subject to unexpected service or landlord charges as you'll own the property. Secondly, you can rent out any space you don't need to other businesses, which could provide a nice bit of extra income. However, some lenders may prohibit you from letting out space so it's important to check the terms of your mortgage if you plan to do this.

A big advantage of owning your property rather than renting is a greater degree of predictability with regards to monthly costs. With a fixed rate mortgage you'll know exactly what you have to repay each month and won't be subject to rent increases imposed by landlords. However, if your rate is variable you will be at the mercy of interest rate changes and it's important to bear in mind that while your business may be able to afford a loan at 5-6%, it could be a different story at 8-9%.

As with a mortgage for a domestic property, you're not going to secure a commercial mortgage unless the lender feels confident the loan can be repaid. The lender will want to see evidence of the company's ability to pay it back, but will also look at your own personal credit worthiness. If there's any evidence of bad credit history you may find you're subject to higher charges or rates of interest. You will probably be asked to provide a business plan and financial projections – all of which should show profitability and financial stability.

Again, similarly to domestic mortgages, there are plenty of options, interest rates and repayment terms available so it's important to shop around for the best deal. This isn't just a question of price. You also need to consider terms that best suit your business. Most high street banks will offer commercial mortgages but you should also talk to lenders that specialise in these types of loans as they may be able to offer you better advice or even more favourable rates.

Your lender is likely to ask for a deposit of at least 20% for any commercial mortgage. If you can't offer at least that then it's important to question the viability of you owning your own business property. As recent times have shown, property values go down as well as up, and if you find yourself in a situation where your loan value is higher than your property's worth, your business will certainly suffer.

Things to consider before signing on the dotted line:

  • What are the fees involved? A favourable interest rate can be negated by hidden costs, so make sure you've totalled up everything before choosing a lender.
  • Will you be penalised for paying the loan off early? Some lenders impose minimum repayment lengths that tie you in to the loan, and accrued interest, for a set period of time even if you have the cash available to pay it back early. Check your lender's terms on this carefully.
  • Grace periods – if your business hits a cashflow crisis, how flexible will your lender be in delaying your monthly repayment date by a day or two? It could make all the difference if you find yourself in a difficult trading period.


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