Grow your business with commercial mortgage financing

Commercial real estate offers an enticing opportunity to expand your investment portfolio and business operations. There are several options available to you if you’re looking to finance a quality commercial property investment for your business. Generally, these financing options fall into two camps – traditional business mortgages and alternative financing. Knowing how and when to use each of these solutions can help you maintain stability while expanding your business.

What is a business mortgage? 

A business mortgage (also called a commercial property mortgage) funds the purchase of commercial property for business purposes. For business owners, buying commercial real estate can help to both expand your physical operations and provide you with a new source of investment value. 

With a business mortgage, you can purchase or refinance various properties, for example:

• Office space or office buildings

• Industrial buildings and factories

• Retail space and storefronts

• Short-term or long-term rentals

Compared to a residential mortgage, lenders consider business mortgages to be a higher risk and impose stricter requirements, like higher interest rates or a higher deposit. Key factors that contribute to a lender’s decision regarding a business mortgage include:

• The value of the commercial property 

• Your business’s credit rating and repayment history

• Your business’s liquidity

The different types of commercial mortgages

Similarly to residential mortgages, commercial mortgages typically come with either fixed interest rates or variable rates, as well as a set repayment period. Most commercial mortgages in the UK have repayment terms averaging around 15 years, though some lenders offer longer repayment periods of 25 years.  

Commercial mortgages can take many forms, including:

• Owner-occupier mortgage: Designed for businesses that intend to occupy the property they’re financing, owner-occupier mortgages offer lower interest rates and longer repayment terms. If your business is seeking a property you intend to utilise for internal business purposes, you can usually borrow up to 75% of the property value. 

• Buy-to-let mortgage: A buy-to-let mortgage is a type of loan tailored to businesses that intend to rent out either a commercial or a residential property to tenants. This type of commercial mortgage can be riskier and more complex, as the amount of financing will be dependent on the estimated rental income the business can receive.  

• Partial commercial mortgage: A partial commercial mortgage (also called a mixed-use mortgage) is intended for purchasing properties designed for both commercial and residential use. For example, a city property that functions as a business on the lower level but an apartment on the upper level could qualify for a mixed-use mortgage. 

What are the benefits and risks of a business mortgage?

When you plan to buy a property for your business, exploring your different financing options can help ensure you find the right solution for you. Traditional commercial mortgages (like owner-occupied and buy-to-let mortgages) can be both advantageous and risky, depending on your business’s financial situation. 

The benefits of a business mortgage include:

• Property ownership: Business mortgages help you become a property owner and establish a real estate portfolio for your business. By owning a property, your business can achieve greater operational control, ultimately opening new opportunities to boost cost efficiency. 

• Investment value: Depending on factors like location and purchasing price, a commercial property can offer your business investment value. Rental income can help with making repayments on your mortgage, lightening your overall financial burden.  

• Tax benefits: You can claim interest paid on the mortgage as an official business expense. When tax season rolls around, you can reduce your tax burden by adding your total interest paid to your list of deductible expenses.  

It’s important to consider the possible financial risks when making any property decisions. Aside from funding the purchase of the property, there are many additional costs and risks to keep in mind when acquiring commercial real estate: 

• Commercial mortgage fees: Fees like arrangement fees, mortgage broker fees, and valuation fees charged on a business mortgage can vary according to the lender. Additionally, the stamp duty land tax is required for properties costing £150,000 or more. Business owners should also consider the cost of legal services, such as insurance or site surveys. 

• Property development or renovation: For businesses that plan to expand on a property – either with a new addition to an existing structure, a renovation, or a completely new construction – you’ll need the financial means to cover the costs of property development. You will likely need to secure additional financing for property development projects. 

• Refinancing: If you opt into a business mortgage with shorter terms, you’ll need to refinance your commercial property more often. Depending on the market conditions, having to refinance your business property can expose you to new risks or more stringent terms. 

• Legal complications: Defaulting on a business mortgage might lead to legal actions and foreclosure over the property. 

Please note that asset finance typically requires an upfront deposit and there is less flexibility with early repayments.

Alternative financing options to traditional business mortgages

Business mortgages offer many key benefits for obtaining a property, while alternative financing can help you develop and manage the costs of said property. 

A business mortgage imposes a lengthy repayment period that averages 15 to 25 years, with some lenders even offering 30-year mortgages. However, there are short-term financing options that can provide either an alternative to traditional mortgages or supplemental financing.

These alternative financing options include: 

• Property development loans: A property development loan helps businesses construct a building from the ground up. With a property development loan, funds are released periodically throughout the construction process as different construction milestones are reached to ensure the funds are used properly. These types of loans are not usually recommended for businesses seeking to renovate or expand an existing structure. 

• Bridging loans: When investing in property, you may experience waiting periods between the approval of a mortgage and actually receiving the funds. Bridging loans help you bridge this gap, providing you with the short-term funding you need to fund a property purchase or related expenses (i.e. legal services, arrangement fees, etc.) while you await long-term financing.  

• Working capital finance: To cover the secondary and tertiary expenses of a commercial property purchase (i.e. insurance, repairs, renovations, etc.), working capital finance can ensure you have the liquidity and financial stability to support expansion efforts. 

Who is eligible for business mortgage financing?

You can purchase a commercial property as either a limited company or a sole trader. 

Purchasing a commercial property as a limited company protects your personal assets from business debts and legal claims, reducing your overall personal financial risk. 

How to apply for a business mortgage and alternative financing in the UK

If you’re looking to buy commercial property in the UK, Funding Options by Tide can help. 

We provide UK SMEs with access to both business mortgage brokers and alternative financing solutions. Through Funding Options by Tide, you can match with 120+ lenders for loans from £1000 to £20M.

Get started with Funding Options by Tide today. 

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.