Securing a business mortgage is a significant step for any UK business owner looking to purchase their premises. Whether you’re considering a warehouse, office, retail unit, or restaurant, understanding the process and requirements can help you work out your options. This comprehensive guide will walk you through the essentials of business mortgages, the application process, and the specifics of different property types.
Understanding Business Mortgages
A business mortgage, also known as a commercial mortgage, is a loan secured against a property used for business purposes. Unlike residential mortgages, business mortgages are tailored to the needs of businesses and can be used to purchase, refinance, or develop commercial properties. These properties can range from warehouses and offices to retail units and restaurants.
Types of Business Mortgages
There are two main types of business mortgages:
- Owner-Occupier Mortgages: These are used to buy property that will be used as trading premises for your business.
- Commercial Investment Mortgages: These are used for property that you plan to let out to other businesses.
In this guide we’ll focus on owner-occupier scenarios, but if you intend to let the property out then read more about commercial investment mortgages here.
Am I Eligible for a Business Mortgage?
Securing a business mortgage involves meeting certain eligibility criteria. These criteria ensure that the lender’s risk is minimized and that the borrower is capable of fulfilling the mortgage obligations both now and in the future. Here are some common factors considered by lenders:
- Credit History: A good personal and business credit score is important. Lenders will review your credit history to assess your reliability. Where you have had historic challenges then you’ll need to be able to explain these and make the lender comfortable that you will be able to meet your mortgage commitments.
- Deposit: Typically, you’ll need to provide a deposit of 25-40% of the property’s value. This will vary depending on property type and the specific lender.
- Business Financials: Lenders will require proof of your business’s financial health, including filed accounts.
- Experience: Demonstrating experience in your industry can strengthen your application. If you have been trading more than 2 years then the process will be much easier for you.
You can get an estimate of how much you could borrow based on your financial performance using our business loan calculator.
Property Types
Different types of commercial properties have unique considerations:
Warehouses
Warehouses are essential for businesses that require storage and distribution facilities. When applying for a mortgage for a warehouse, consider the following:
- Location: Proximity to major transport routes and customers is crucial.
- Size and Layout: Ensure the warehouse meets your storage needs and allows for efficient operations.
- Condition: The property’s condition can impact its value and the cost of any necessary repairs or upgrades. Warehouses must comply with various regulations, including planning laws, safety standards, and environmental requirements, including ensuring that the Energy Performance Certificate rating meets or exceeds legal minimums.
Offices
Office spaces are vital for businesses that need a professional environment for their employees and clients. Key factors to consider include:
- Location: Accessibility for employees and clients is important. Consider proximity to public transport and amenities.
- Size and Layout: The office should accommodate your current workforce and allow for future growth.
- Facilities: Modern facilities and technology infrastructure can enhance productivity and attract talent. Make sure that the Energy Performance Certificate rating meets or exceeds legal minimums.
Lender appetite for offices varies significantly depending on the factors above, as demand for offices varies, particularly depending on location.
Retail Units
Retail units are crucial for businesses that rely on foot traffic and customer interaction. When seeking a mortgage for a retail unit, consider:
- Location: High foot traffic areas or locations with a strong retail presence can boost business.
- Visibility and Accessibility: Ensure the property is easily accessible and visible to potential customers.
- Layout and Space: The layout should be conducive to displaying products and accommodating customers.
Lenders will consider the specific use of the unit and will tend to prefer resilient sectors, such as local convenience stores, with a more cautious approach to sectors such as clothing retail.
Restaurants and Bars
Restaurants have specific requirements due to their operational needs. When seeking a mortgage for a restaurant, consider:
- Location: High foot traffic areas or locations with a strong dining culture can boost business.
- Kitchen and Dining Space: Ensure the property has adequate kitchen facilities and dining space to meet your needs.
- Licensing and Regulations: Compliance with health and safety regulations is critical. Ensure the property meets all necessary requirements.
This can be a challenging sector, and lender appetite can mirror this. Real consideration will be given to management experience and location, as those who are new to the sector can find it difficult to succeed.Â
Should I Buy the Property in a Company Name?
You should give some real thought to what entity you buy the commercial property in. The answer to this will have tax implications as well as risk implications both now and in the future. Get some advice from your accountant and solicitor before jumping straight in. Generally your options include:
- Buy the property in the same entity as your business – whether that’s personal name or company name
- Buy the property in your personal name and let it to your business
- Buy the propery in a new company and let it to your business (also known as an “opco propco” structure)
Read up on some more on these options in this guide.
Challenges and Considerations
While obtaining a business mortgage can be beneficial, there are challenges to be aware of:
- Higher Interest Rates: Business mortgages often have higher interest rates compared to residential mortgages due to the perceived higher risk.
- Complex Application Process: The application process can be more complex and time-consuming, requiring detailed financial documentation and property valuations.
- Cost of arranging: The cost of setting up a business mortgage is much higher than with a residential mortgage, as lender fees, valuation fees and legal fees are all more expensive.
How to Apply for a Business Mortgage
Applying for a business mortgage involves the following main stages:
- Preparation: Gather necessary documents like financial accounts, bank statements and property information. Share these with your commercial finance broker if using one.
- Submit Application: Choose a lender and submit your application with required documents. Be ready to provide additional information as requested.
- Valuation: The lender will value the property, inspecting its condition, location, and market value. Establish whether the lender will lend based on vacant possession value or higher market value. Read more about commercial valuations here.
- Underwriting: The lender reviews your application, financial documents, and property appraisal to assess risk and decide on approval.
- Approval and Completion: If approved, you’ll receive a loan offer with terms and conditions. Review and accept the offer, proceed with legal formalities, and receive the mortgage funds.
Make It Happen
Securing a business mortgage can be a challenging but process, but is vital to move ahead with your business goals. By understanding the requirements, preparing thoroughly, and seeking professional advice, you can increase your chances of success. Whether you’re looking to purchase a warehouse, office, retail unit, or restaurant, a business mortgage can provide the financial support you need to grow and thrive.