Particular function: A information to industrial mortgages throughout the pandemic

United Kingdom
The financial health of UK SMEs is a hot topic these days for good reason, and making the right financial decisions is more important than ever in the current climate. Because unsecured loans are difficult to get in many cases, more and more entrepreneurs are turning to commercial mortgages. LCN asked Gary Hemming (pictured) of ABC Finance to provide timely advice to our readers.

In this guide, Hemming describes how commercial mortgages (https://abcfinance.co.uk/commercial-mortgages/) work, when to consider them, and what you are likely to pay for.

How do commercial mortgages work?

Similar to residential mortgages, money is loaned to you and secured against property, in this case against your business premises.

Where would a commercial mortgage be appropriate?

They can be used to buy a new property or to refinance the property you are currently trading from. There are a number of reasons entrepreneurs are turning to commercial mortgages during the pandemic, including:

  • To secure a better interest rate
  • To reduce your monthly costs (either through a lower rate, longer term or by switching to interest)
  • Funding to support business during the pandemic

Because collateral is offered for a fee on your property, the likelihood of getting approved is usually much higher than an unsecured business loan.

The downside is that commercial mortgages typically take 6-8 weeks to complete, while business loans are often completed within 5-7 days.

How much can i borrow?

As with anything, the pandemic has affected the commercial mortgage market. Lenders now tend to consider lower credit scores and stricter criteria, as well as affordability checks.

The amount you can borrow depends on the nature of your business, with different types of business being offered different credit at values. This is due to the perceived risk of the business type. The current value loan offered to laundry and cleaning companies is as follows:

  • Retail Cleaning – Up to 70% LTV
  • Commercial Laundries – Up to 75% LTV

As mentioned above, the maximum LTV is based on risk and is assessed individually. A commercial laundry is more likely to hit 75% if it has long contracts with hospitals than one that has ad hoc contracts with hotels in the current climate.

How much will it cost?

The main commercial mortgage costs are interest, lender agreement fees, valuation fees, legal fees, and in some cases brokerage fees.

Commercial mortgage rates (https://abcfinance.co.uk/commercial-mortgages/calculator/rates-and-fees/) can vary widely, with banks typically 2.75-3.5% and challenger banks 4.5- 7% charge.

The other fees are as follows:

  • Lender referral fee – 1.5-2% of the loan amount. This is calculated after the mortgage is closed and can usually be added to the loan.
  • Appraisal Fees – The amount charged will depend on the type of property you are hedging the loan against and its value. This fee must be paid during the application process and cannot be added to the loan.
  • Legal Fees – The amount charged depends on the lender and the loan amount. These fees are usually paid at least in part during the application process and cannot be added to the loan. You should set aside £ 2-4,000 for assessment and legal costs as a guide.
  • Broker Fees – When using a broker, they usually charge 1-2% of the loan amount after the loan is closed. Not all brokers charge fees, so it is worth looking for a fee-free broker.

How are applications evaluated?

Lenders generally review a few key points: –

  • The creditworthiness of the company and its owners
  • The security feature offered
  • The LTV of the application
  • Whether the loan meets the affordability criteria

During the pandemic, lenders tend to elaborate on the last point. In addition to looking at 2-3 years for the business, you will be asked how Covid-19 has affected the business. Lenders will examine the trade decline during the pandemic (if applicable) and the future prospect of the business.

It is a good idea to come up with a short document detailing this, including the initial impact, trade rebound, and prospects for the future. More details are usually better here, and show the lender that you are well prepared and increase confidence in your company.

You will also likely be asked about using Bounce Back and CBILS loans. Where it was taken is not a problem, but the lender will want to understand what was taken and how the money was used.

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