A commercial mortgage is availed for expensive business needs, in which a commercial property is offered as a security to the lender. You apply for a commercial mortgage when you are expanding or redesigning your office space.
This mortgage is granted for acquiring or redeveloping offices, professional practices, pubs, bars, hotels, restaurants, business parks or factories. This type of loan MUST be for your business use, and should not be connected with your residential needs.
Features Of A Commercial Mortgage
1 – The mortgage amount must be greater than £25,000 that must be secured by the borrower. In contrast, unsecured loans are available with lenders for amounts less than £25,000.
2 – Since the amount is high, you only get a loan for 70-75% of the property value. You need to pay the rest 30% in the form of a deposit.
3 – Usually, the term of the mortgage is between 3 to 25 years. (Bridging loans are available for a term of 2 weeks to 24 months).
4 – The rate of interest is fixed if the repayment period is less than 10 years. A variable rate of interest is offered if the mortgage duration is more than 10 years.
5 – The rate of interest depends upon the risk factors involved. Some of them are your experience in the business field, the scope of a business, profit estimation, business plans and the risk involved in the investment.
6 – Any ongoing loan against the mortgaged property must be paid off before submitting it as a security.
Steps To Apply For A Commercial Mortgage
1. Decide the Purpose of your Loan
There can be various reasons for you to apply for a commercial mortgage.
You may have decided on entering into a new business field. You may be adding more stores to your chain. You may need money to increase cash flow in your business. Your business may be highly flourishing, leading you to open another factory.
The first step towards the borrowing process is deciding the amount and purpose of your mortgage. It can be for buying new equipment, new office space, business-related utilities (trucks, furniture, etc), or redesigning the existing business places. The purpose must be strictly related to your business needs.
Once you know what you need the money for, you decide the amount that you need. Know your accounts, and see what you can already pitch in. Do not increase your mortgage for avoidable reasons. You should keep your borrowings to the minimum.
2. Study your Borrowing Status
If only it was a perfect world, we all would get what we want. In this case, you may or may not get the whole amount you ask for.
A commercial mortgage is a long and expensive investment. And no one likes a bad investment. Your lender will have numerous concerns regarding your mortgage application. The first ones will be your credit history and current business financials.
A bad credit score might close a lot of doors for you. Your options may be limited and expensive in such a case. Poor business returns have the same effect.
Your current financial status affects your borrowing power greatly. However, your vulnerabilities can be covered by valuable security or a guarantor. The lender should have enough reason to approve your application. He should believe that his money is secure and that your business will not go downhill.
Once you have realized which category of borrowers you fall into, you can shortlist your available options in the market to apply to. You should avoid knocking at closed doors.
3. Apply to Lenders
The last step is to prepare your application to submit to the lender. Most lenders require the following documents for a commercial mortgage application:
1 – Completed application form
2 – Identity, and address proof
3 – Personal and Business bank account statements
4 – Details of all properties owned, rented or leased
5 – Official documents of the Mortgage
6 – Proof of all sources of income
7 – Business plans/ Purpose of mortgage
8 – Preferred loan structure
Additional Costs Related To A Commercial Mortgage
In addition to the loan amount, there are several additional costs that you should take into consideration.
1 – Legal Fees
2 – Administrative costs
3 – Property Valuation costs
4 – Early Repayment Cost
Fees of a commercial mortgage broker, if you hire one. (It is completely your choice, but it definitely saves you the trouble of going lender-hunting. Moreover, using an expert is never a bad option).
Useful Tip: After you have selected a lender, it is good for your business to call up the lenders whose offer you rejected. This maintains a healthy relationship and might benefit you in future borrowings. Signing up for a commercial mortgage is a careful and responsible investment. Make sure to read the agreement carefully before signing. Analyze if it is exactly what your business needs.