UK
The financial health of UK SMEs is a hot topic at the moment for good reason and making the right financial decisions in the current climate is more important than ever. With unsecured lending being difficult to come by in many cases, more and more business owners are turning to commercial mortgages. LCN asked Gary Hemming, (pictured) of ABC Finance to offer timely advice to our readers.
In this guide, Hemming breaks down how commercial mortgages (https://abcfinance.co.uk/commercial-mortgages/) work, when they should be considered and what you can expect to pay.
How do commercial mortgages work?
Much like residential mortgages, money is loaned to you and is secured against property, in this case, your business premises.
Where would a commercial mortgage be appropriate?
They can be used to purchase a new property or to refinance the property that you currently trade from. There are a number of reasons that business owners are turning to commercial mortgages during the pandemic, including:
- To secure a better interest rate
- To reduce their monthly costs (either through a lower rate, a longer-term or by switching to interest only)
- To raise finance to support the business during the pandemic
As security is being offered, by way of a charge over your property, you will usually be much more likely to be approved than you would be for an unsecured business loan.
The downside is that commercial mortgages usually take 6-8 weeks to complete, whereas business loans are often arranged in 5-7 days.
How much can I borrow?
As with everything, the pandemic has affected the commercial mortgage market. Lenders are now tending to look at lower loan to values and more stringent criteria and affordability checks.
The amount you can borrow will depend on the nature of your business, with different business types being offered different loan to values. This is down to the perceived risk of the business type. The loan to values current offered for laundry and cleaning businesses are as follows:
- Retail drycleaning – Up to 70% LTV
- Commercial laundries – Up to 75% LTV
As mentioned above, the maximum LTV will be based on risk and judged individually. A commercial laundry will be much more likely to achieve 75% if they have long contracts with hospitals than one which has ad-hoc contracts with hotels in the current climate.
How much will it cost?
The key costs of commercial mortgages are the interest, lender arrangement fees, valuation fees, legal fees and in some cases, broker fees.
Commercial mortgage rates (https://abcfinance.co.uk/commercial-mortgages/calculator/rates-and-fees/) can vary greatly, with high street banks usually charging 2.75-3.5% and challenger banks charging 4.5-7%.
The other fees are as follows:
- Lender arrangement fee – 1.5-2% of the loan amount. This is charged on when the mortgage is completed and can usually be added to the loan.
- Valuation fees – the amount charged depends on the type of property you’re securing the loan against and it’s value. This fee will need to be paid during the application process and can’t be added to the loan.
- Legal fees – the amount charged will vary depending on the lender and the loan amount. These fees will usually be at least partially paid during the application process and can’t be added to the loan. You should set aside £2-4,000 for valuation and legal fees as a guide.
- Broker Fees – where using a broker, they will usually charge 1-2% of the loan amount on completion of the loan. Not all brokers charge fees, so it is worth looking for a fee-free broker.
How are applications assessed?
Lenders generally check a few key points:-
- The credit history of the business and its owners
- The security property offered
- The LTV of the application
- Whether the loan meets their affordability criteria
During the pandemic, lenders are tending to go into slightly more detail on the last point. On top of looking at 2-3 years accounts for the business, you will be asked about how Covid-19 has affected the business. Lenders will look at the downturn in trade during the pandemic (where applicable) and the future prospects of the business.
It is a good idea to provide a short document detailing this, including the initial impact, how trade is bouncing back and the prospects for the future. More detail tends to be better here and will show the lender that you’re well prepared, increasing their confidence in your business.
You are also likely to be asked around the use of bounce back and CBILS loans. Where they have been taken, it’s not a problem, but the lender will want to understand what was taken and how the money was used.
