Many of us have aspirations of becoming the next big success in the world of business - or, at the very least, living the lavish lifestyles of the rich and famous we read about so regularly.
The big question though is how do you get there? How do you give your business the nudge it needs to allow you to blossom into the next Branson or Roddick?
A great step in the right direction is owning your business premises.
A recent survey* found that whilst 40% of UK firms between six and 10 years old still lease their premises, 70% believe ownership would further spur their business growth.
You can use a commercial mortgage for a number of purposes, such as:
• Buy your own business premises
• Expansion of your business
• If you want to start investing in commercial property – for instance, renting out offices to other businesses
• If you’re interested in getting into property development
The most common reason though is at the top of the list - enabling people to buy their own premises.
The advantages of buying your business premises include:
• The mortgage repayment is likely to be similar to the rent on the same property
• There are no unexpected rent rises
• There’s often the option to sub-let
• Interest payments on a commercial mortgage are tax-deductible
• Simplified cash flow management
• Any gain in value will increase capital
People who are suited to getting a commercial mortgage to buy their own premises typically share some or all of the following characteristics:
• Your business is typically at least five years old
• You can prove you know your market inside out
• You got some trading security, for instance evidence of a steady stream of work
• You’ve got strong, experienced management – this could just be yourself, or if you run a larger company it would be yourself and your senior team.
Currently in the UK, the economic climate is right to consider a commercial mortgage. The rental market is rising, interest rates are stable, and in most sectors, businesses are doing well.
The commercial mortgage market is more complex than basic residential mortgages. However the market is getting to be as competitive as residential and buy to let.
Information about commercial mortgages can be scarce, choices are limited and the process isn’t as straightforward as a domestic mortgage. Therefore, your bank or your financial advisor needs to explain the differences and limitations of a commercial mortgage to you, such as what the higher fees involves and loan-to-property values.
Commercial mortgages can vary depending on you industry sector and the quality of the business. In general, however, for small or medium-sized loans, a maximum loan to value of around 75% is the norm – with up to 80% available for high quality propositions.
All loans are specific to the individual business however to secure the loan, you’ll probably need to meet the following criteria:
• The property is deemed to be in reasonable condition for its use
• The debt is serviceable by the company
• The property is in a viable location
• There is a freehold agreement or reasonable lease term
As with a domestic mortgage, the length of a commercial mortgage loan period tends to be a maximum of 25 years.
Typically there will be a lenders fee of between 1% and 1.7% charged by mainstream banks for the prime lending, and as much as 4% or higher if in the sub-prime sector; and commercial valuations are more expensive than residential.
There are also higher legal costs from both the borrower’s and lender’s solicitor.
What you need to think through
• Do you have the right level of deposit available?
• You need to be comfortable with committing yourself and your business to one location
• As with the mortgage on you home interest rate changes can affect the monthly payments. Make sure you can withstand any changes.
• You’ll stop having a landlord to fallback on so be prepared to take care of the maintenance, fixtures and fittings, decoration and security yourself.
• As with all investments the value can go down as well as up so again you need to be comfortable with all potential future outcomes.
• Before taking the plunge, a business should be happy with this environment, certain that sales can sustain the new mortgage and confident that the costs of the mortgage will remain stable.
You can talk with your bank or financial advisor today about a commercial mortgage but if you want to be one step ahead you can get your documentation together ahead of time.
• The two most recent years of trading accounts (established businesses)
• Details of assets and liabilities
• Details of any personal investment there might be
• Six months of personal and business bank statements – originals
• Details of professional contacts
If the company is buying a business and property combined, they’ll also need to provide the following info:
• Reasons why the business is being sold
• Projections on how the business is expected to grow
• Credit status of the business
If you’re interested in commercial mortgages the next step is to find out a bit more and see how much you could borrow.
*HSBC survey
