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Business Funding 4 min read

Can A Business Take Out A Mortgage?

Matt Haycox
23 March 2020
Written by Matt Haycox

Short answer? Yes, a business can take out a mortgage.

But if you're asking that question, the likelihood is you're looking for more detailed specifics.

In which case, this blog post has you covered.

We'll answer the following questions:

  • What is a business mortgage?
  • What can a mortgage do for your business?
  • What types of business mortgage are there?
  • How to get a business mortgage?

What is a business mortgage?

A mortgage is a loan toward the cost of a property. The business must use the property for wholly business purposes.

A business can use a mortgage to:

  • Acquire a property.
  • Refinance a property (to replace an existing mortgage, or to cash out a portion of equity).
  • Redevelop a property.

Many people also ask "can a business get a residential mortgage?". The answer is yes, as long as you use the residential property for commercial purposes.

So if you want to borrow toward the cost of an apartment complex with the view to generate rental income, a commercial mortgage is a suitable option.

If you want to borrow through your business to finance the purchase of your personal home, however, this is not possible.

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What can a mortgage do for your business?

A business mortgage can deliver several benefits to your business:

  • At the end of the mortgage period, your business will own the property.
  • While paying off the mortgage, you'll be working toward ownership, rather than putting your money in a landlord's pockets.
  • The total spent on mortgage interest will be lower than what you'd have spent on rent in an equivalent period.
  • You can release equity from the mortgage when required by refinancing.
  • The property may increase in value. In this instance, the value of your investment increases as well. When renting, this increase in property value would lead to higher repayments, disadvantaging you and benefiting the landlord.
  • Financial forecasting becomes more simple with a mortgage because repayments are less prone to variation than rent.

Also, interest rates are usually lower on commercial mortgages than other types of business finance, thanks to the high value of the property the loan is secured against.

 

What types of business mortgage are there?

There are several types of property finance, from the simple commercial mortgage through to more elaborate options designed to target specific situations.

Commercial mortgages

This type of finance is a loan secured against a property which will be used solely for business activities, or which represents a business in its entirety.

Commercial mortgages are a great choice if your business wants to transition away from leasing their premises, or if you're looking to establish a buy-to-let business model.

A business can also take out a mortgage on all or part of a property they already own to unlock the capital it represents - referred to as 'refinancing'.

See the Funding Guru commercial mortgage page for more info.

Portfolio finance

Whereas a commercial mortgage sees a loan secured against one property, portfolio finance allows you to borrow against two or more properties.

The cash borrowed can be used to acquire more property, develop one or more of the properties within the portfolio, or just to free up some of the capital locked inside.

Because the value of the portfolio is high, portfolio finance usually offers lower interest rates than commercial mortgages.

See the Funding Guru portfolio finance page for more info.

Bridging loans

If you need short-term finance to bridge the gap between acquiring new property and being approved for a mortgage that entirely covers its cost. Equity in a property you already own is unlocked and used as a downpayment for another purchase.

Whereas mortgage terms can span several decades, the upper limit for bridging finance is usually one year.

See the Funding Guru bridging loans for more info.

Development finance

This type of loan is for businesses who want to develop a new property or redevelop an existing property. Terms are tailored toward this outcome and will differ slightly than if you were to borrow the equivalent amount through a commercial mortgage.

See the Funding Guru development finance for more info.

Mezzanine finance

This funding type is a hybrid of debt and equity finance and tops up funding shortfalls on high-cost property projects. If you've secured the majority of the investment you need through a mortgage, mezzanine finance could provide the remainder of what's required to get the project over the line.

See the Funding Guru mezzanine finance for more info.

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How to get a business mortgage

The quick answer? Submit your application and wait for the approval.

The commercial finance marketplace is crowded, and tons of lenders vie for your attention with competitive rates and terms. It's worth taking the time to find the right mortgage for you.

Lenders will assess your viability based on their own lending criteria. They'll look at:

  • Credit rating.
  • Your current financial situation, including cashflow and debt.
  • Your projected financial situation.
  • Your assets.
  • Your business plan.

Business owners with less-than-ideal credit histories may find it challenging to get a commercial mortgage, hence why various business finance solutions exist.

 

The dos and don'ts of business mortgages

To sum up, a business mortgage can help you to finance the acquisition of one or more properties that you'll use for commercial purposes.

This could be office space where your primary business activities will take place, or it could be an apartment complex intended to generate rental income of its own.

Other types of commercial property finance exist, too. They can help you to fund development, to bridge temporary finance shortfalls, or to top up funding gaps.

Applying for a business mortgage is easy, but not all business owners meet the criteria required.

Funding Guru prides itself on taking into account the plans of a business, as well as its history - so if you're a business owner struggling to get a commercial mortgage, get in touch.

Originally published 23-Mar-2020 09:33:57, updated March 23 2020

Topics: Business Funding

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