Business locations such as offices, shops and factories are an extremely important asset for any business. However, the initial purchase costs, or building and construction costs of these premises can cause cash flow problems for even the most cash flow generative of companies. A commercial mortgage can potentially be a great way of spreading the cost of the purchase of a premises, whilst reducing the initial capital outlay.
A commercial mortgage is a very different proposition than a residential mortgage. There are lots of differences, but for example a commercial mortgage can also be used to raise finance for other business activity as well as the outright purchase of a premises. In addition commercial mortgages will require significantly higher levels of equity than a residential mortgage, this is primarily down to the liquidity of the commercial property market, where it can be much more difficult to sell, compared to a residential property, as there are such a wide variety of different factors which need to be considered, such as the tenants, the terms of the lease with the the tenants and also the location.
As with residential mortgages there are both fixed and variable rate options available. A fixed rate arrangement will normally have a premium attached to it, but this will mean that your monthly payments will be fixed for either the term or for a period of time, which can help businesses cash flow. The variable rate option will normally be tied to Bank of England Base Rate, or Finance House Base Rate, and as this rate fluctuates your monthly payments will change.
Any interest which is incurred throughout the term of the mortgage to the business is tax deductible, which provides a significant advantage. Therefore, it is not unusual where a business owner may have the amount of funds available, for the business owner to purchase using a commercial mortgage. It would be suggested that you discuss the best option for your company with a tax specialist, who will be able to advise the specific impact on your company.
In effect the lender will take a charge over the property until such time as they have received the required capital and interest payments. At the end of the term the title of the property will then transfer over to the business. If a default situation is to occur, then this will lead to the lender exercising its right to own the property which it can then go and sell.
The process of application for a commercial mortgage is relatively straightforward, and the lender will typically underwrite both the business based on its previous performance as well as the individuals who run the business. There will be standard information which will be required, and this will normally entail 3 years worth of financial statements, as well as any projections or forecasts which you may have. This will then generate a score based on the type of business which you have, which in turn will generate a rate of interest over and above the fixed rates.
It is important to consider that your existing lender will not necessarily offer the best rates for a commercial mortgage, and as such you need to consider the alternatives. A broker can be a great way of doing this, as they will be able to identify which lenders have an appetite for commercial lending within different sectors.
Make sure that you are entirely comfortable with the terms which are being offered, and also consider if you are to lose a major customer, what impact this would have on your ability to meet the required repayments. This is typically a long term decision and one which should not be taken lightly.
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