Business and commercial loans

Commercial finance is lending that’s designed for commercial businesses rather than individuals. It’s another term for business funding or business finance, and comes in a range of different forms.

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Business and commercial loans

In the ordinary course of business, there will be times when a business needs to purchase an item of high value or to cover unexpected expenses that coincide with periods where cash flow is low. Small to medium-sized businesses are reliant, just like individuals, on lending products such as secured loans, unsecured loans, working capital finance, and revolving credit facilities

What can I use a commercial loan for?

There are really no limits or restrictions on what you can use a new credit facility for. Business owners will apply for funding to boost cash flow, purchase new machinery, pay for an office expansion, or any other expense related to the business. Anything for personal use will not be granted as a commercial loan, for example, the director’s family holiday or a holiday home. 

Types of business loan

A commercial loan or business loan can come in different shapes from unsecured business loans, secured business loans, and asset finance to peer-to-peer loans, bridging loans, and commercial mortgages. A lending platform will be able to match you with the most suitable lender once they understand a bit about your business and why you need funding. They will compare what's on offer from a panel of vetted and regulated lenders and an account manager will talk you through the options to find a loan that works best for your business. Once you've decided on a loan, a lending platform will take care of everything to ensure that you get your funds as soon as possible. 

What type of commercial loan is the best?

Business owners looking for a new source of funding will have to decide what type of business loan is best suited to the business. There are three main types of finance for most businesses: debt, where the business borrows from a 3rd party to fund business operations, equity, where a private investor provides cash in return for part ownership of the business, and cash, when a business finances growth via cash injected by the business owner, friends, or through government grants. In this article, we will cover some of the main types of commercial mortgage available to business owners.

Long-term fixed-interest commercial mortgage

As the name suggests, a fixed-rate mortgage carries a fixed interest rate, regardless of changes to the underlying base rate. Fixed-rate commercial mortgages are favoured by businesses that need to know exactly how much they will have to pay each month, and the lender can guarantee the exact amount of repayments on your mortgage. They will also appeal to borrowers who feel certain that interest rates are about to increase, and expect that these rates will remain high for the foreseeable future.

What are average fixed-rate commercial mortgage rates?

Fixed commercial mortgage rates on a commercial property fluctuate over time in line with changes in the bank LIBOR rate. One way a commercial mortgage differs from a residential mortgage is the risk premium. A good example would be if a supermarket chain wanted to borrow money it would pay a few percentage points above the base rate. A loan secured against a long-established business will have much better terms. Strong applications can get a rate of 2.5%, or even lower. However, the majority of loans will cost between 3.5% and 6%. In the case of owner-occupied commercial mortgages, the range is from 2.3% to 6.5%.

The commercial fixed interest rate and loan amount on offer will depend on how risky a financial services provider deems your industry and business to be, which can vary between different lenders. This is why it is worthwhile to use a lending platform to shop around. Especially considering the valuation fee, a fee charged by your mortgage lender for commissioning a mortgage valuation, will vary from lender to lender. A mortgage valuation is an inspection of your property, for a lender to consider if it's too risky to lend against.

What is an interest-only commercial mortgage?

The second type of commercial mortgage is an interest-only commercial mortgage. This type of loan is also referred to as a balloon loan and is suited to businesses that predict a large cash stream in the future, which allows them to avoid monthly repayments in the short term. Payments are made throughout the term loan, which can be up to 25 years, on the smaller interest amount and the full balloon payment is due at the end of the term. Businesses will use interest-only mortgages to buy time and build their business with a lower cost base until it reaches a stage of viability. The mortgage terms will suit a startup or a business that expects a period of having negative cash flow, until a later stage. 

What is development finance?

In brief, development finance is a short-term funding option that lasts between 5 months and two years and is tailored to assist business owners with the purchase costs and build costs of a commercial development project including an extension to a business premises.

Be mindful that any business owner with a registered office in the UK, i.e registered in England and Wales will be protected by the FCA if they chose a lender that is authorised and regulated by the financial conduct authority UK. You can search the FCA register by firms or individuals, and this will provide you with some comfort that the lender you are in contact with is regulated. You can also use a lending platform to save you time, as all lenders on a platform like Funding Options are regulated by the FCA.

Commercial Loans for Businesses

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