Buying business premises? Read our 2023 commercial mortgage guide first!

When purchasing premises on a commercial mortgage in 2023, business owners should consider several key factors. Here are some important considerations:

1. Financial Stability: Before applying for a commercial mortgage, business owners need to assess their financial stability and ensure they have the means to make regular mortgage payments. Lenders will evaluate the business’s financial records, creditworthiness, and ability to generate sufficient income to repay the loan. If you are currently paying rent we can add this back to your profits to demonstrate your ability to cover your commercial mortgage repayments. Lenders would like to see your latest three years accounts and that they would cover the loan, even with a stressed rate of interest (which varies from lender to lender) but where that’s not possible some lenders have more flexible requirements so it’s always worth discussing your commercial mortgage requirements with us at the earliest possible stage.

2. Property Assessment: It’s crucial to conduct a thorough assessment of the property being considered for purchase. This includes evaluating its location, condition, size, planning use, other regulations, and potential for future growth. Engaging a professional surveyor can help identify any structural issues or potential risks but if you’re going to apply for a commercial mortgage then the lender will likely arrange a valuation and possibly a survey, so discuss this with your funding expert at before you go ahead. If you will need to make changes to the property then factor this into your costs so that we can arrange funding if you need it.

3. Affordability and Loan Terms: Your funding partner will help you to determine how much they can afford to borrow and analyse the loan terms offered by different lenders. Factors to consider include the interest rate, loan duration, repayment term, and any associated fees. Comparing multiple loan offers can help find the most favourable terms.

4. Deposit and Equity: Lenders typically require a deposit for a commercial mortgage. Business owners should assess their available funds and determine the amount they can contribute upfront. A larger down payment can potentially lead to better loan terms and lower interest rates. Additionally, having equity in the property can provide more financial security. The maximum loan to value available for most businesses is 75% – leaving a deposit requirement of 25% plus associated costs. In some cases we can help to reduce this deposit – to the point where 100% funding may be possible in some circumstances;

pub mortgage business mortgage
Pubs and hotels present a special case for funding.
  • A sitting tenant purchasing the premises of the business they already trade. Whilst this does not work in all cases, business which are valued with “transferable goodwill” such as pubs, hotels and care homes can attract lending based on the marriage value of the property and the existing business. Speak to our commercial mortgage experts to find out if your business could benefit from this option. We are regularly arranging commercial mortgages at up to 90% of purchase price in these cases.
  • Other sitting tenants purchasing their premises. The cases above are very sector specific but in many other cases a similar scenario exists, industrial buildings which have had extensive, bespoke fit outs, or situations where a vendor might offer a discount for the sitting tenant against the freehold. These situations can help us to make a case for higher borrowing on a case by case basis.
  • Leveraging other assets. To help raise funds to reduce your deposit our commercial mortgage advisors will take a look at your other business assets and liabilities to see if there are alternate ways to fund the deposit. There are often options you might not have thought of so do call one of our experts on 02039233664.

5. Cash Flow Analysis: It’s essential to understand your business’s cash flow to ensure it can comfortably handle the monthly mortgage payments along with other operational expenses. A detailed financial analysis should be conducted to assess the affordability of the loan and the impact it may have on the business’s profitability. At the time of writing in June 2023 we’ve seen 13 consecutive increases in the Bank of England base rate to a current 5% (which may not be the peak!). That means your business should be able to weather future increases in the rates. So stress test your potential payments, understand the potential risks in your sector and you’ll have a robust case for support from a commercial mortgage lender.

6. Legal and Tax Considerations: Purchasing commercial premises involves legal and tax implications. It’s important to consult with legal and tax professionals to understand the legal requirements, such as obtaining necessary permits and licences, and to evaluate the tax implications associated with property ownership as well as potentially paying business rates. You can check how much you’ll pay in Stamp Duty Land Tax (for England and Wales) here, or Land and Buildings Transaction Tax (for Scotland) here.

7. Future Expansion or Exit Strategy: Business owners should consider their long-term plans for the property. If there is potential for business growth or expansion, ensuring the property can accommodate those plans is crucial. Alternatively, if there is a possibility of selling the property in the future, evaluating its marketability and potential resale value is important.

8. Insurance and Maintenance Costs: Owning commercial premises entails additional costs beyond the mortgage payments. Business owners should factor in insurance costs, including property insurance, liability insurance, and potential business interruption coverage. Additionally, budgeting for regular maintenance and repairs is necessary to preserve the property’s value.

By carefully considering these factors, business owners can make informed decisions when purchasing premises on a commercial mortgage in 2023, aligning their financial capabilities with their long-term business goals.

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