What are commercial mortgages based on? How much can you borrow? What security do you need?
Lenders will look at the value of the property used as collateral and both the operating and credit history of the business to determine how much money they are willing to lend to a business.
A prospective lender will examine your track record to find out if you are credit worthy - ie likely to be able to pay back the money. They will look at your previous debts and see whether there is a history of any problems. If you have had problems with credit in the past, talk to your lender about it. Some credit problems have extenuating circumstances, which will allow for a loan to be granted, and some lenders may accept applications from business owners who have an adverse credit history.
Most lenders need to see the last three years’ accounts and an accountant’s certificate to assess affordability and the health of the business. They may also ask for a business plan, including cash flow projections for the following 12 months and a curriculum vitae for each of the applicants so they can assess business experience. They may also apply for personal status references as well as those for the business.
Assessable income is based on the average of the retained net profits during the last two-year period and the figure must be sufficient to cover annual interest charges twice over. The lender will make any adjustments for depreciation, non-recurring items and existing interest charges, for example.
Lenders terms and conditions will vary, but typically, lenders will offer a minimum of £25k for up to 25 years. Generally the loan to value (LTV) ratio (ie the ratio of the loan amount to the property valuation) is up to 75 per cent, but many will offer up to 100 per cent if you have additional security.
While the lending criteria of many mainstream commercial lenders disqualifies applicants who do not have three years’ audited accounts, and who lack a business plan, or have a blemished credit history, lenders are becoming more flexible and more willing to assess each case on its individual merits so shop around.
Whatever your position, be prepared to demonstrate why you have a very good chance of repaying the mortgage. Your property adds security but the lender will still base their decision on your ability to repay the mortgage. It will work in your favour if you are able to show the lender a history of your earnings and a projection of future earnings.
The lender is also likely to arrange for a property appraiser to estimate the market value of the property, which will help the lender feel that the property is sufficient collateral for the mortgage.
