There are lots of different ways of financing your company, here we will discuss the commercial mortgages options available, and how these are structured.
A commercial mortgage in principal works in a very similar way to a residential mortgage, however, there are some differences which you need to consider.
First the rate of interest will normally be a variable rate, which will calculated with a margin over and above the Bank of England base rate.
The term of the mortgage, may be significantly shorter than your typical residential mortgage, with most commercial lenders offering a term of 1-30 years. This provides flexibility, if your business is generating cash flow, this can help to increase the assets on your balance sheet.
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Typically, when looking to finance a commercial property, the lender will consider a number of factors, these include:
How long your business has been trading for.
The strength of the balance sheet of your business.
How much debt you have outstanding.
How much money you will need to generate to "break even". Known as the "break even turnover". This is considered as if your business was to lose a number of customers, how much business do you need to write to pay your overheads.
In addition if you are too reliant on one client, i.e. they generate more than 25-30% of your businesses turnover then you may struggle if you were to lose this client.
If you are purchasing an investment property, i.e. one which your business is not intending to base itself from, this may add further questions to this list, including:
- What the expected income from rentals will be.
- What are the profiles of the businesses which will be renting from you.
- What terms of rental have the businesses committed to.
Also, the banks will normally expect an increase over the "interest cover", i.e. your return to be higher than the interest payments. This will normally be expected to be in the region of 120%-190% depending on which lender you are talking to.
Typically the fees which commercial lenders will charge will be higher than for a residential mortgage, including some lenders charging an arrangement fee, as well as an acceptance fee. These can range from 0.5% to 1% each.
It is certainly possible to make substantial money from investment through commercial property, however, you should consider these areas as a complete minimum before you get started.
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