Commercial Finance – What you Need to Know
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As a business looking to start-up and develop your value within a premises, or perhaps a firm looking to expand and purchase new offices, the possible utilisation of commercial finance may come to mind.
In this guide, we hope to help you understand what commercial finance is and how you can leverage it throughout the growth of your business.
Commercial finance is a collective term given to a range of business finance products that include both short and long-term solutions, offered by a provider external to your business.
How Pia Financial Services can help:
We are experienced in the area of Financial Services and by utilising that experience, you will be in a better position to understand which financing option will work hardest for you. Below we have outlined some of the options available.
Commercial mortgages are, in effect, secured loans utilised for the acquisition of a trading premises, or a secured loan that releases value from a currently owned property. As opposed to residential mortgages, they are geared for business use and thus are much more complex in nature, require a higher investment to begin the process, and are generally geared towards much more expensive investments.
Commercial mortgages differ in scope to buy-to-let mortgages, which are often higher volume and do not assume a business will solely trade from that specific property. Commercial mortgages can also be used to expand or renovate a business property, buy out a competing owner’s share for total autonomy, or allow existing loans to become consolidated.
Who Are Commercial Mortgages Aimed At?
Commercial mortgages are aimed at any business operating with at least three years of trading history (on average), and allow businesses to acquire or refinance the value of a property set against its value.
Commercial mortgages can offer a contract length of anywhere from 3 to 30 years, with 25 years being far and above the most popular and commonplace option.
Aside from this, commercial mortgages are rather open in scope, catering to property and businesses in the leisure industry, standard office trading businesses, retail units, restaurants or hospitality services, potential land development, or farm and agriculture. As such, there’s a good chance that firms with comparatively recent trading history will qualify for a commercial mortgage of some kind.
Commercial Investment Mortgage
This type of commercial mortgage is a type of loan used typically to refinance or purchase a commercial property which is let to tenants. Rates and fees are typically higher than on an owner occupied property. Typically borrowing starts at £25,000 and up to 75% Loan to Value is available. They can be interest only or repayment and most property types are considered – e.g. Commercial buildings or retail properties.
Commercial Buy to Let (BTL)
This type of commercial buy to let mortgage is used to purchase a property which is then let to one or more businesses. It can also be referred to as a commercial landlord mortgage. It differs from a standard BTL mortgage which is residential and not for letting to businesses. These are used exclusively where no residential element is involved. Applying for a commercial buy to let usually involves specialist advice. There are a number of reasons for this, but mainly because commercial mortgages are considered to be a specialist type of finance. it’s advised to speak to an advisor who can give you a budget and plan to work towards before searching for a commercial property.
This is a form of short term finance, secured on a property asset. The difference between bridging finance and a mortgage is that the loan can be secured against a property that may not be suitable for a normal term loan.
Funds are generally quicker to materialise for a bridging loan than a standard commercial mortgage. Typically 3-4 weeks, and the bridging loan is often based on the value of the property, rather than the purchase price.
In addition the interest for the bridging finance can be rolled up throughout the term, which means there would be no monthly payments to consider.
Why use a bridging loan?
Commercial enterprises may use a bridging loan for a number of reasons, some examples are included below:
- Raise finance quickly
- Refurbish a property
- Finish a development
- Buy at auction
- Purchase property that would not secure a mortgage in its existing condition with a mainstream lender
- Bridge a shortfall of funding between buying and selling property when a sale is delayed
- Raise a deposit for purchasing property
Using a specialised broker can be highly advantageous when arranging development finance. The volume of paperwork required for a full development finance application can be daunting. An experienced broker can prepare a well put together and professional proposal, to ensure your project is best presented to a lender as well as highlighting any areas that may be a cause for concern.
Development finance can be used to finance build costs and land purchase. The highest loan to value development finance plans will fund up to 70% of the land cost and 100% of the build costs, provided the loan amount does not exceed 70% of the gross development value.
Why use Development Finance?
Even if you are in the fortunate position of being able to fund a development project yourself, there are still advantages to using development finance for all or a proportion of the project costs
Here are some of the compelling advantages to use development finance:
- Avoids tying up your cash until the project is sold, you don’t know how long this will take, you may have an alternative use for the funds in the meantime
- Finance enables you to take on larger projects than you would otherwise be in a financial position to consider, potentially increasing your profit opportunity
- You may be able to undertake multiple projects simultaneously, or avoid having to wait until an existing project is sold, before you start on your next
- Your return on investment rate (ROI) will be greater if you are putting in less capital. You will have the cost of financing to pay from your profits, but the actual rate of return on the amount that you have personally invested will be higher
Commercial mortgages and some Bridging Finance are not regulated by the Financial Conduct Authority