Many business owners prefer to buy their own property, rather than renting, and that’s true of both established businesses and start-ups. To do that, they will require an owner-occupied commercial mortgage.
As commercial mortgage lenders usually use previous trading history to confirm affordability, start-up businesses present a challenge. In the absence of previous, reliable trading figures, proving affordability can be difficult.
In this guide we will break down when start-up business can qualify for a commercial mortgage, likely finance terms and the documents required to get your application moving.
Will I qualify for a commercial mortgage?
Most start-up businesses can qualify for commercial mortgages, but there are a number of important factors in ensuring your application is successful:
- It’s important that you know the likely profitability of your business to ensure the proposed loan is affordable. The early days in business can be tough and the lender will not want you to put additional strain on the business unless it’s sure you can afford it.
- Although the applicant’s credit history doesn’t have to be perfect, heavier adverse credit, such as recent County Court Judgements (CCJs), mortgage arrears or current cash flow problems may be a cause for concern.
- Not all industries will be able to achieve the same level of borrowing, so it’s worth checking upfront to ensure you will qualify. For example, agricultural mortgage applications come with their own specific rules.
Our experienced commercial mortgage advisers are always on hand and ready to talk through your circumstances. They will be able to quickly tell you the chances of success for your application.
What will the lender offer?
When looking to take on a commercial mortgage for a start-up business, your lending options will be limited. Most lenders will only accept applications from established and profitable businesses.
As such, high street rates aren’t usually available, and the deposit needed is higher than applications for established businesses. You can usually expect to borrow up to 60% of the property value as a maximum. Meaning a deposit of at least 40% of the property value is required.
Interest rates for start-up businesses are usually in the region of 7% per annum. The rate charged is higher than those offered to an established business and is designed to reflect the increased risk of lending to a business that is yet to prove its profitability.
The higher interest rate can usually be offset slightly by the option to take out the loan on an interest only basis to keep the payments down.
Of course, once you’ve got some solid trading history behind you, you’d be able to refinance to a lower rate elsewhere.
What documents will I have to provide?
When looking to take out a commercial mortgage for a brand-new business, there are a number of common documents that will usually be requested.
- Projections – Projections will be used to assess the affordability of the loan. As they play such an important role in the lending decision, it’s important that they are completed to the highest possible standard. Detailed projections are a must and should be prepared upfront.
- Business plan – The lender will be keen to understand how realistic your projections are, and that’s impossible without a detailed breakdown of what you will do, and how you will do it. When completing your business plan, it’s important that you break down each area in detail to give the lender the clearest possible picture of your new business.
- Bank statements – Each lender will require between 3-6 months personal bank statements. These will be needed upfront, so make sure you have your statements to hand, and ready to give to the lender. If you can’t find any of your last 6 months statements, you can request them from your bank and they will send them out. This can take a week or so and requesting them upfront will prevent delays further down the line.
What are my alternative options?
What are my alternative options?
The main alternatives are to either rent a property until you have some trading history behind you, or bridging loans.
Bridging loans can be used as a way to purchase a property quickly for new businesses. In addition, you may find your application more likely to be approved as bridging lenders tend to have very flexible lending criteria.
How can I make sure I get the best possible deal?
Commercial mortgages are always priced to risk, with the lowest risk applications generally securing the best deals.
With a start-up business, you’re working from a lot of unknowns in terms of trade levels, profitability and unexpected teething problems/costs. As such, you need to try to control this perceived risk through preparation.
As mentioned above, we will always need projections and a business plan to fund a start-up business. The key is to ensure that they’re as robust as possible. Projections can be checked by either an industry expert or an accountant, which will carry much more weight.
Where existing deals are in place with potential customers, provide full detail and correspondence confirming this to be the case where possible.
If you have knowledge of, or there is information out there on profit margins for the industry, then also provide that.
Presentation is also key, making the effort upfront when producing these documents will save a lot of time and money later down the line. It’s important to also remember that you only have one chance with most lenders and once they decide not to lend, it’s extremely difficult to get that decision overturned.
Is there any way to get a low rate start-up commercial mortgage?
Yes, high-street banks can and will occasionally fund start-up businesses, but they will choose to work with only the strongest propositions.
This means a business with a very experienced operator, a clear credit history for the Directors and shareholders and a robust and detailed business plan showing strong profit.
Where funding is offered through a high-street bank, you can expect your interest rate to drop to around 4%.
What other funding could start-up businesses qualify for?
Funding for start-ups is tricky, especially without security. Start-ups could qualify for an unsecured business loan through the government scheme but will need to provide lots of very detailed information.
Th alternative is to look at a government grant, which differs from a loan in that it doesn’t generally need to be repaid. Government grants exist around the country to cover set up costs such as training courses, equipment purchases and funds to set up your business premises.
For those who can’t qualify for either of the above, secured business loans are available and may be easier to fund. They do require a charge over property, which gives added security to the lender. Again, these loans are issued as a lump sum to you and are then repaid by regular monthly payments over a set term, in much the same way as a personal loan or mortgage.
Once you’ve been trading for 3-6 months, businesses that take card payments may qualify for a business cash advance. Companies that issue invoices to its clients on delayed payment terms may want to consider invoice finance and when purchasing new equipment, may qualify for asset finance.