Commercial property finance has many variants, sometimes making it complex and difficult to understand. There are several platforms out there, each suiting different projects – and the usual problem is finding out which product best suits your business needs. Here’s our guide to the more common commercial property finance products available on the market.Apply Now
Growing businesses will often reach a point where their commercial premises are too small to comfortably house existing and new recruits. Given the high price of commercial rents, many businesses decide to purchase a commercial property giving them more control and, any money spent enhancing the property benefits the business and not the landlord.
Owning a business premises makes your balance sheet strong and it becomes easier to access alternative sources of finance in the future. However, buying a property is expensive and you will need to thoroughly understand the commercial property finance market, beforehand taking out a commercial mortgage.
Very few business owners have enough cash in reserve to pay for a new property without the need for additional funding. It’s worth noting that the primary difference between a residential mortgage and a commercial mortgage is that a significantly higher deposit is required by the lender. In the case of owner-occupied commercial properties, businesses can usually borrow up to 75% of the value of the property. For buy-to-let mortgages, where the property will be rented on the open market, the amount of property finance which can be accessed will be determined by the estimated rental income receivable. Monthly payments, which can last up to 30 years, are much longer than for a business loan, but shorter-term options are also available through property development finance and bridging loans, which we will speak about now.
If you are building a property from scratch, a property development loan might make sense. That is because it is only used during the build stage of the project. The funds are released throughout the construction process as key milestones have been reached, and agreed upon in advance with contractors. This is a good way to keep the contractor motivated to finish the build as quickly as possible.
A property development loan would not be suitable for a business looking to renovate or expand its business premises unless it was a new build.
Like all other loans, a property development loan starts with an application. You select a lender, and this can be done via a broker or lending platform. The advantage of using a lending platform is you can be sure that all lenders are regulated by the financial conduct authority. Once you have provided all of the necessary details such as the value of the property, development plans and an exit strategy, the lender will provide you with information related to finance and quotes. It’s important to always shop around, as different lenders will have varying interest rates that will apply to your commercial investment. The advantage of using a lending platform is that you will be matched to the lender with the best rates and terms, specific to your business needs.
As you build your property portfolio, there will be times that selling and buying dates don’t match up and you need a loan to cover the purchase of a new property. This is where a bridging loan comes into play. There might also be a need for this type of property funding if you are buying at auction and you don’t have access to the funds by the time the property auction comes around.
Typically when it comes to short-term funding loans in the UK for property acquisitions, a lender will allow you to borrow an amount between £50k and £10m, terms and conditions apply. On average, the most you will be able to receive including interest will be capped at 75% of the loan to value. Bear in mind that the loan will be secured on the property, or across multiple separate properties to spread the risk. In contrast to a property mortgage, a bridging loan is not linked to your income and is repaid in a shorter timeframe than a traditional mortgage.
This is an important consideration for budding property investors. If you purchase a property through a limited company as opposed to as a sole trader you only stand to lose when you put in, and unlike a residential mortgage, you won’t lose any personal assets like the family home. Increasingly, investors are buying properties through limited companies. If you are planning to purchase a buy-to-let, a house in multiple occupation (HMO), or a holiday let, you will need to research whether a limited company is the best way to do it.
One of the benefits of using a limited company to buy property is that you can retain profits within the company and use this income to fund separate purchases without paying income tax. However, income tax will be payable once you draw the profits out of the company.