For the sake of clarity, we will define a commercial mortgage in two distinct ways as described below.

  • Commercial mortgages for businesses – Typical applications as below:
  • Retail businesses – any public facing business found on any high street or in retail parks selling goods to the general public.
  • Manufacturing businesses – Usually very high value factories but can start with small workshops through medium service outlets.
  • Farms and land – farms and smallholdings to crofts and fish farms.
  • Service businesses – these may range from small to large financial services companies, IT companies and internet retailing.
  • Commercial mortgages for the property investor – these would suitable for investors purchasing property portfolios for the rental market as opposed to investors purchasing individual property which would normally be provided by high street lenders.

Businesses do hold assets in property and equipment and stock but much of their on-going success comes down to the quality of their their management and the good will of their clients. Markets can change over time and this can affect the viability of any business. This means that lenders will require to undertake proper studies of the business to be mortgaged prior to offering finance.

Commercial Lender considerations

  • Business plan – This is a key requirement for any business and a lender will look to this for proof that the business has been properly researched. This business plan should clearly set out what the business is intended to do, how it will do it and how it will develop over the period of the loan. Areas of specific interest are:
  • The market – Lenders will want to understand where your clients will come from and what plans you have to build on these clients over time.
  • Business management – How the business will be managed is most import and lenders will want to see proof that the management have the appropriate skills and experience to properly run the business.
  • Business accounts – if the loan is to purchase an existing business the lender will look for at least the last three years certifies business accounts. If it is a new business, the lender will want to see within the business plan your cash flow projections for the coming years.
  • Lender security – the lender will carry out a risk assessment on the business and base heir lending accordingly. This will take account of some of the following:
    • Bricks and mortar – the asset value of any property held by the business.
    • Land – This will be as above after suitable survey.
    • Stock – Any stock held by the business will be valued.
    • Other liquid assets – Plant and machinery, it equipment and office equipment would apply here.
    • Credits – If the business has ongoing contracts or is awaiting payments of debt, the lender will assess the value of these and treat them as assets.
  • Other lender security – where the lender cannot accrue sufficient assets to provide security for lending, they may take into consideration other types of security, such as:
    • Other property – residential property, portfolios of rented investment property or land provided they hold sufficient equity.
    • Other investments such as stocks and shares – ownership or part ownership of other businesses or portfolios of stocks and shares may be considered but these will need to be assigned to the lender if a loan is granted.
  • Business insurance – The lender will expect the business to be properly insured against all normal business hazards.

Cost of commercial mortgages

Commercial mortgages cost more than ordinary mortgages for a number of reasons such as.

  • Mortgage arrangement fees – Because of the extra work the lender will have to do to consider the application, higher arrangement fees ate likely to be charged.
  • Mortgage interest rates – Interest rates will be set to take account of lender risk as opposed to standard rates. The higher the risk the higher will be the interest rate.
  • Business survey fees – Survey fees will vary greatly and will be set individually to match the work required for the survey. With large complex businesses there could be a number of surveys required which could have a high cost.
  • Business due diligence – Complex businesses may require professional expertise to carry out any due diligence on the business prior to purchase.
  • Commercial broker fees – although it is possible to talk directly with a commercial lender, because of the complexities involved it is always sensible to engage a very experienced broker to help you arrange your commercial mortgage. He or she will have knowledge of the whole market and may be the key to you successfully obtaining the right mortgage on the right terms.