By Gary Hemming, commercial lending director, ABC Finance
Choosing the right base for your business is a key decision and has a big influence on the culture and perception of the company. As a business owner, there is another key decision to be made – should you rent or buy your business?
In this guide, we will break down the benefits and drawbacks, how finance works and the main points to consider.
The main advantage of owning your business premises is the flexibility it offers you. Renting is often considered the more flexible option, but this isn’t the case as you’re often tied in with a long lease, while you can choose to sell at any time if you own the property.
In addition, you can usually fix your monthly repayments, often for up to 10 years. This gives you certainty of your future outgoings in a way that wouldn’t be possible when subject to regular rent reviews.
Finally, while you’re prone to rent increases when you lease a property, you’re likely to see increases in your property value if you own it. The swing between these two figures can be significant in the long term.
The main disadvantage to buying is the much higher upfront costs. Commercial property can be expensive and most commercial mortgage lenders would expect a minimum 25 per cent deposit.
How commercial mortgages work
Commercial mortgages work in much the same way as their residential counterparts. The loan is released in a lump sum and is then repaid over a set term, usually up to 20 years. Some lenders will give you the option of taking the loan out on an interest-only basis, meaning you only pay the interest each month. Where this option is taken, the capital is due back as a lump sum at the end of the term.
When taking out a commercial mortgage, there are two major costs to take into account. The first is the interest rate, with lower interest rates resulting in lower monthly payments (assuming you’re comparing two mortgages with the same term). Some lenders offer both variable and fixed-rate options. Fixed rates give you the security of knowing your monthly costs, but means you won’t benefit should interest rates drop.
The second major cost is the lender’s arrangement fee. Most lenders charge a fee when the loan is issued, usually, 1.5-2 per cent of the amount borrowed. In most cases, this fee can be added to the loan.
The other purchase costs to consider
Although the above costs are the major ones involved, there are some others to consider. The main additional costs are the following:
• Stamp duty – The rates for commercial property are slightly different from residential. You pay nothing on the first £150,000, 2 per cent on the next £100,000 and 5 per cent on the remainder of the purchase price
• Surveyor’s fees – These are paid to a RICS surveyor in order to undertake an inspection of the property. They will produce a report on the condition and value of the property, which is generally issued to both the lender and the borrower. The cost of surveyors’ fees is dependent on the value of the property and can range from a few hundred to several thousand pounds
• Legal fees – These work in much the same way as those for residential property purchases. They are generally due partway through the process and, again, depend on the value of the property. They generally range from one to several thousand pounds. When taking out a commercial mortgage, you are usually liable for the lender’s legal fees in addition to your own
• Broker fees – Although not all brokers charge a fee, many do. These fees are generally due on completion of the purchase and can range from a small fixed fee to 1-2 per cent of the loan amount. Some brokers charge upfront non-refundable fees to get started. It’s generally not a good idea to pay upfront fees to a broker with no guarantee of success.
How are applications assessed?
Lenders usually want to see your company accounts in addition to your personal and business bank statements. They will want to see sound financial management in these and will use them to assess your ability to afford the repayments.
They will also check the credit history of both the business and its major shareholders. They will again use this as a measure of the financial management of the applicants.
Finally, the contents of the valuation report are key as the property is the lender’s security, should you fail to keep up repayments. As such, they want to see that the property is strong and demand in the area is reasonable.