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Commercial mortgages for small businesses

Commercial mortgages for small businesses

Category: Business
Author: Derin Clark
Updated: 01/04/2019

At a glance

  • Although the size of a business is not an issue when applying for a commercial mortgage, it may not be the most cost-effective option for small businesses
  • For guest houses, even if the owner is living in the property, if three rooms or more are being rented the council will normally class it as a commercial property
  • Lenders are often reluctant to approve commercial mortgage applications from new businesses and if they are accepted the interest rates will usually be higher

Are there commercial mortgages for small businesses?

Yes, the size of the business is not the issue when applying for a commercial mortgage. Saying this, low value commercial mortgages (for example those less than £25,000) are not so readily available and may not be the most cost-effective overall solution due to the setup costs.

What is a commercial mortgage?

A commercial mortgage is a loan that is secured against a non-residential property, normally lending £25,000 or more over a five to 30-year repayment term. If you would like to find out more about commercial mortgages visit our commercial mortgage page.

Will I need a deposit for a commercial mortgage?

Yes, no matter what type of business you are you will normally have to pay a deposit to obtain a commercial mortgage. The amount of deposit you will have to pay will depend on how risky a borrower the lender considers you to be, along with the lender's appetite for risk. You can find lenders accepting 100% loan-to-value commercial mortgages, but for greater access to the best rates a deposit of 25- 40% is normally required.

Can I get a commercial mortgage with less than three years' accounts?

Lenders often ask to see the past three years' accounts from businesses as a way of determining if the loan is affordable. Normally lenders will be reluctant to lend to businesses that can't provide these accounts, however exceptions are sometimes made depending on your circumstances and by having a clearly thought-through business plan.

Are there commercial mortgages for limited companies?

Yes, commercial mortgages are available for all types of business as long as they meet the lender's application guidelines, for example being able to prove profit through three years' worth of accounts and ensuring that the property is considered as being for commercial use. This means that even if an owner of a company that is trading as guest house is living in the property, typically if there are more than three rooms being let then the property is no longer residential and would be classed by the council as commercial. The property is then valued on the basis of its profits, not what the house next door is worth, and rated on a commercial basis.

Are there commercial mortgages for new businesses?

There are commercial mortgages available for new businesses but, because new businesses are at a higher risk of failure, interest rates will be higher and many applications will be declined. New businesses, unless very well capitalised, will typically rent premises until their concept is proven due to the additional strain that buying a property makes on scarce capital resource in the first three years.

Should I get a broker when applying for a commercial mortgage?

Often it is advisable to use a specialist broker when applying for a commercial mortgage. This is because, unlike with residential mortgages that are high volume and normally pre-packaged, commercial mortgages are much lower volume and depend on the presentation of a well-argued case to the lender to be accepted. A broker will be able to weigh up all the facts of your application as well as advise you on which lenders to approach.

What are the risks involved with a commercial mortgage?

As a commercial mortgage is a secured loan against a property, the main risk is that you will lose your property if you are unable to meet the repayments. Before applying for a commercial mortgage, you should consider the affordability of the loan and whether or not you will be able to continue making repayments if the interest rate increases.

Moneyfacts tip

If you are a small or new business looking to borrow less than £25,000, an unsecured business loan may be a better option than a commercial mortgage.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.