Expansion is a necessary task for businesses looking to grow. You might need larger premises to support your staff or inventory growth, you might find your current premises’ rent a drain on your cash flow, or you have another reason entirely. Whatever the reason behind your need for expansion, you must first secure funding.
For businesses, one of the best methods of raising capital is a commercial mortgage. True to the name, this form of finance is geared towards businesses looking to fund purchases for commercial use. In this article, we will be discussing this form of finance, breaking down what it is, how it works, and the benefits of using a commercial mortgage. Let’s get started.
What is a commercial mortgage?
Commercial mortgages exist for businesses looking to purchase land or property for commercial use. This means that, unlike a residential mortgage, commercial mortgages must be applied for by businesses and used to benefit their economic activity. Commercial mortgages fall under the umbrella of secured loans, meaning that property must be used as collateral in order to obtain this kind of loan. This works the same way as a residential mortgage; collateral assets, in this case property or land, will be used to obtain the loan, and can be seized by the lender if the borrower defaults.
Commercial mortgages are not solely for the purchase of land or property, however. In addition to this purpose, commercial mortgages can be used to develop a property for commercial use, such as refurbishing part or all of a business in order to increase commercial activity. Commercial mortgages can also be used to purchase property for rental purposes, alongside the development of properties to increase their sale value. Essentially, if you intend to purchase property for business or economic use, a commercial mortgage could be right for you.
How does a commercial mortgage work?
As we mentioned, commercial mortgages are secured loans, meaning they require collateral for the loan to be secured against. While this constitutes an increased risk for the borrower compared to unsecured loans, it has the benefit of giving commercial mortgages a high value cap. In other words, the value of your commercial mortgage is directly tied to the property you use as collateral, potentially making you eligible for loans into the millions.
Commercial mortgages are long-term loans, typically lasting in excess of 20 years, much like a residential mortgage. Depending on your lender, you may be expected to put forward a higher percentage of the property’s cost than with a residential mortgage. Generally, a commercial mortgage lender will expect borrowers to provide 20-30% of the property’s value, while they cover the rest. This is highly dependent on your particular lender and agreement, however. Many commercial mortgage lenders are willing to deviate from the norm if given a convincing reason, so shop around for one that best meets your needs.
Commercial mortgage repayments work the same way as other long-term business loans, with monthly repayments lasting until the total value plus interest is paid off. As mentioned earlier, there is the added risk posed by using collateral. If you default on your loan, you stand to lose your collateral assets, as a lien will be placed against them once the loan is approved. Essentially, this entitles your lender to seize these assets, usually the property being purchased or another property owned by the borrower, in order to recover their money. As such, you should exercise caution when using commercial mortgages, and any other secured loan, especially if your financial situation is rocky.
Advantages of using a commercial mortgage
A commercial mortgage can offer businesses a suite of significant advantages, regardless of whether you need a small refurbishment to your current premises, or require a new one entirely. Here are some of the most prominent advantages:
Fast access to finance
One of the main advantages to using a commercial mortgage, and many other forms of secured finance, is that they provide capital in a short space of time. This is chiefly due to the comparatively quicker application process; as the value of collateral assets is the main concern, this speeds up applications compared to the more document-oriented loan types. This can be especially useful to property purchasers, as the window for buying property is often slim due to the competitiveness of the market.
Low interest rates
Commercial mortgages tend to have a lower mortgage rate than unsecured loans for a similar purpose. This is of particular note considering the long repayment terms of commercial mortgages; high interest rates paid over 20 or more years can be quite a strain on a business’s finances. Moreover, you have the option to pay fixed monthly repayments over the course of your loan. This gives you increased control over your business’s outgoings, making it easy to plan your finances.
Cheaper than rent
Oftentimes, what you would pay monthly in rent is higher than what you would pay for a commercial mortgage. This is especially useful for small businesses, who would benefit twofold; purchasing their own commercial premises will work out to be cheaper in the long run than paying rent, while they also have complete control over their own property. Opting for rental premises instead will be a pointless expenditure overall, as such properties cannot be sold down the line, while also limiting the control business owners have over the property their businesses operate from.
Wrapping up
A commercial mortgage can be a great solution for businesses looking to expand, or simply refurbish what they currently have. Commercial mortgages can supply businesses with large sums of money over a long period of time, allowing for a wide range of projects to be carried out with a considerable amount of flexibility. Furthermore, a commercial mortgage is cheaper than many alternatives in the same vein, applying less pressure on a business’s finances.
However, it isn’t a perfect solution, having its fair share of downsides. Commercial mortgages will require security, which can be limiting for businesses with assets of low value. This collateral also adds noteworthy risk for businesses with rocky finances, as default will mean your lender is entitled to seize your property in order to recover the debt. As such, it is best to carefully consider your solution and the benefits of a commercial mortgage before making a decision.