There can be many reasons why a business chooses to take out property finance, including outgrowing an existing space, looking to expand a portfolio or looking for the first commercial space. Although making that decision can be difficult enough, choosing which finance option is best can be just as hard. There are so many options available and there is no one solution for every business.
Here is our guide on how to finance a commercial property, including what to consider and the different types of finance available.
Interest rates are one of the key things to consider when reviewing commercial property finance options. The level of interest rate will have a major impact on how much will be repaid, including monthly payments and length of payments.
Not only this, but as interest rates fluctuate, it can affect the number of potential buyers for commercial properties. If the interest rates go down, more people are likely to look at investing in property, both residential and commercial. This could lead to commercial properties having more interested parties and selling quickly. On the other hand, when interest rates go up, purchasing a property becomes a less attractive opportunity which is likely to lead to fewer potential buyers.
If a business already owns property or other assets to secure a loan against, this could impact the choice of property financing. For some lenders, they could offer preferable interest rates or be willing to loan more, depending on the assets a business already owns. There is also no need to put personal assets on the line and there can be less emphasis on trading history or credit scores.
There are many legislations in place to protect sellers and buyers when purchasing a commercial property, including the financial side of the purchase. This could include mortgages, debentures, facility agreements, covenants or acquisition agreements. It’s important to note that there is a difference in legal requirements between purchasing a property in England and Scotland. For example, key commercial terms differ such as a property in England can be freehold, but in Scotland, it’s known as a heritable title. There are also differences in the due diligence process and how contracts are signed.
Similar to when reviewing finance options, it’s important for any business or individual looking to purchase a property professional support, especially if they’re not familiar with the differences in buying in England or Scotland.
An intangible asset, goodwill is associated with the purchase of one existing company by another company and accounts for the excess purchase price. This intangible element is the value of the business calculated on the net profit that the business generates and normally has to be paid by cash. There are several items that are considered goodwill including proprietary or intellectual property and brand recognition, items that are not easily quantifiable and that often has an indefinite life span.
There are a number of finance options available for individuals or businesses looking to purchase a commercial property.
Although not a common commercial property finance option, it is possible to buy a commercial property with cash. Similar to a residential property, cash can make up the complete payment for a property or can be used to pay for a proportion with a loan or mortgage making up the rest of the amount.
A commercial mortgage is a type of loan which is secured on a non-residential property such as an office, building, shops or industrial complexes. They can provide finance for buying assets and property, and can be available for a range of business sizes and types.
There are several different types of mortgages including:
This type of finance offers a short-term funding solution designed to assist businesses in reaching a certain point, and there must be a clear exit strategy. A bridging loan can last up to 2 years, depending on the loan company, and any property it’s used on must be at least 40% commercial. Therefore, in a building that consists of a retail unit and a residential flat above, the retail unit must be worth at least 40% of the building’s overall value.
A secured loan allows businesses to obtain a loan based on the assets already owned by the business such as existing property, vehicles or machinery. If a business is unable to repay the loan, the lender has the right to claim and sell the assets to recoup their money.
There are also several alternative funding options that could be used to finance a commercial property such as:
These offer an alternative way for a business to seek the financing they need to either purchase a new property or invest in expanding an existing portfolio.
As with the more traditional approaches, a business or individual should always review the benefits and drawbacks of each funding method to see which works best for them, their business and circumstances. If unsure, professional assistance should be sought to ensure all funding options are considered.
Once you’ve decided on how you’d finance your next commercial property, it’s time to find the property of your dreams! Take a look at all our commercial properties on the market right now, ranging from pubs and retail units to guesthouses and industrial spaces.
If you can’t find your ideal property, get in touch, as we’re happy to help find your perfect property.
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