Balance pros and cons of commercial mortgages

House and cash
House and cash

FINANCIAL institutions will be looking to put businesses under the microscope – including seeking rock-solid guarantees – before they hand out commercial mortgages.

The banks taking part in the Project Merlin agreement with the government have committed to lend to demonstrably viable firms.

Money is still available if businesses can jump through hoops including proving they can repay the investment.

Commercial mortgages are typically for a period of at least 15 years.

As well as the need to prove the business is on a sound financial footing, firms will need to come up with a substantial deposit.

This could mean either money is diverted from other uses or the directors will have to find a way of providing the cash – which often means personal property on the line.

The government’s company advice service Business Link says most lenders will apply a loan-to-value ratio and will expect business owners to invest a proportion of their own money in the purchase.

As a general rule, the more personal wealth is put on the line, the better the chance of getting a good commercial mortgage.

The loan-to-value ratio is the loan amount divided by the current market value of the property expressed as a percentage.

If a property has a current value of £200,000 and a loan is required for £150,000, the loan-to-value ratio is 75 per cent.

But it is important not to over-borrow and it may be prudent, if possible, to draw down the mortgage a bit at a time.

Lenders will almost certainly require evidence of the creditworthiness of individuals.

The lender’s decision will also depend on current circumstances – a commercial lender will expect a firm to be stable and profitable.

They may ask to see a business plan and long-term financial projections, to assure themselves that it has, and will continue to have, the ability to make repayments.

In the end it comes down to an assessment of whether owning a business has more advantages than taking a lease.

Owning bricks and mortar can be a great investment. A true home can provide both stability from the risks of rent rises and be a significant asset in its own right.

There’s also the possibility of subletting free space for an income, and interest payments on a commercial mortgage are tax-deductible.

There are also considerable disadvantages to owning business premises. The deposit is one and firms may find it difficult to relocate if a buyer can’t be found. And owning a property brings with it responsibility for upkeep, decoration and anti-crime measures.

> For much more information visit www.businesslink.gov.uk/south_east