Commercial finance explained

Business finance or commercial finance as it is often referred to is a fantastic resource for many companies to develop their plans or to acquire commercial premises. According to the Q1 2019 Royal Institute of Chartered Surveyors (RICS)’ Commercial Property Market Survey, demand for commercial property has fallen sharply over the past few years.

Perhaps understandably, recent high street closures and Brexit uncertainty have shouldered a large amount of blame for the decline, but it is possible that another reason exists: that we are not knowledgeable enough about commercial finance to properly commit ourselves.

A survey by commercial estate agent savoystewart.co.uk took commonly searched questions on commercial property and finance, and then analysed each one for evidence of how unsure we really are.

What is commercial property?

The survey results revealed that every month, 390 Brits ask search engines, ‘What is commercial property?’ This was the most frequently asked question, which goes some way towards proving that many of us are indeed commercial investment novices.

Essentially, it is property used for carrying out business activities. Not only does commercial property refer to buildings that are home to active businesses, but also profit-generating land and some larger rental properties.

Commercial finance, therefore, is a term that refers to a wide range of products, offered by an external provider, that offers both short- and long-term solutions to provide working capital for companies.

Short-term commercial finance options include business credit cards or business finance bridging loans, while asset-based lending and commercial mortgages are broadly considered long-term commercial finance options.

Where many smaller businesses may suffer their loan application being rejected by the major banks, the recent expansion of the commercial finance landscape means that by working with an independent adviser such as NM Finance, which has access to whole-of-market, alternative finance providers can offer more options than ever before.

How to value a commercial property

The second and third most-asked survey questions were: ‘Do you pay stamp duty on commercial property?’, and ‘How to value a commercial property?’ The truth is that calculating the value of commercial property can be complicated. Unlike residential property, for which nearby properties provide an indicator of value, commercial property is valued according to the amount of net operating income (NOI) that the property generates every year.

This method involves taking the actual income of the property and subtracting most operating expenses (excluding mortgage payments). As these expenses will depend on the age and type of the property, the NOI – and subsequently the property value – can vary. For example, an older property will require more investment to repair and maintain, resulting in a lower valuation, while a new-build valuation will be based on its anticipated annual income.

Meanwhile, stamp duty (a compulsory, self-assessed tax payable by property purchasers in most parts of the UK) does apply to commercial property, but it is not payable up to a certain threshold.

Leasehold properties attract stamp duty on the leasehold purchase price, and on the value of its annual rent.

How to rent out commercial property

‘How’ was shown to be a common search term in the world of commercial property and finance, with many of us particularly eager to learn about the specifics of renting. For example, ‘How to rent out commercial property?’ is a question Googled 180 times every month.

Commercial property is a business asset, so it is naturally treated differently from a residential home when it comes to offering it for rental opportunities. Prospective commercial landlords must not only be able to meet their own financial objectives, but also keep updated with relevant legislation, as well as exercising a general duty of care towards the public.

A written tenancy or lease agreement must be drawn up, defining the fundamental aspects of the relationship between the commercial landlord and the tenant. It is also important to make sure that the correct insurance policies are in place.

When it comes to calculating rent, a general view is that the higher the property value, the higher the rental value. However, the location would also need to be factored in, as well as the size and condition of the building, plus any facilities or equipment that are in place.

Can you get a mortgage on a commercial property?

One of the key questions, ‘Can you get a mortgage on a commercial property?’ and more curiously, ‘How to buy commercial property with no money?’ were high on the popular search list, with the questions Googled up to 130 times each month.

Commercial mortgages can be complex and many lenders will only offer bank base rate or LIBOR-linked variable rate loans, however there are also some fixed rate products available. The majority of commercial loans will be taken on a capital repayment basis, but there are some interest-only options available in the market.

You could also expect to pay a higher interest rate when compared with a residential mortgage, as commercial mortgages are considered a higher risk to lenders. However, the interest on your commercial mortgage will be tax-deductible, and your capital could increase along with the property’s value over time. There is, of course, the added option of renting the property to generate additional income if needed.

The liquidity of the property being purchased is key and in general there is always going to be greater appetite for standard commercial property such as shops or offices in good locations rather than more specialist property such as rural land or bars/restaurants. However each case is considered on its merits and the lender may be comfortable with a quite unusual property if there is a strong applicant and business plan in the background.

Do I qualify for commercial finance?

Generally, commercial lenders will prefer borrowers to be current homeowners, and that they will already have some form of property investment experience. If they also have a ready deposit, cash in the bank and ample evidence of income, their chances of approval will be significantly increased.

Of course, there are still options available to prospective borrowers if they do not meet the criteria mentioned above, such as a short-term loan, bridging finance or even a personal loan, for which you do not have to be a homeowner to apply. NM Finance is expertly positioned to advise on the best type of commercial property finance or business loan to meet your needs.

Commercial property and finance may be something of a minefield at first glance, and certainly, if you are considering applying for commercial finance, bridging finance or a business loan, you would be well advised to speak with a mortgage broker which has experience in this type of lending, such as NM Finance.