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How To Finance a Commercial Property

How To Finance a Commercial Property?

 

Buying a commercial property isn’t as complicated as it seems. If you need to purchase your first office or want to grow your business, there are different ways to get the money you need.

From explaining traditional loans to bridging finance, and other methods, this blog explains how to finance a commercial property in a way that works for you.

 

What Is Commercial Property Finance?

Commercial property finance refers to how businesses can get money to buy property used for business purposes. This includes spaces such as offices, shops, or warehouses. Unlike residential mortgages, commercial property finance is specifically for business needs.

 

Types of Commercial Property Financing Options

There are several ways to finance a commercial property, each with its benefits and requirements.

  1. Commercial Mortgages
    • A commercial mortgage is a loan to buy a property for business use. There are two main types:
      • Owner-Occupied Mortgages: These loans are for businesses using the property themselves.
      • Commercial Buy-to-Let Mortgages: These loans are for businesses that purchase commercial property as an investment rather than for their use.
    • To get a commercial mortgage, you must pay a deposit and agree to repay the loan with interest over time. The interest rates and repayment plans may vary.
  2. Bridging Loans
    • Bridging loans are short-term loans to help you buy a property quickly. They are useful when you need money right away without having to wait for a regular mortgage.
      • Short-Term: You have to repay the loan within a year.
      • Higher Interest Rates: These loans have higher interest rates because they are short-term.
  3. Secured Loans
    • A secured loan is a type of loan that is backed by collateral which means you use something valuable, such as another property or business equipment as security. This means if you can’t pay back the loan, the lender can take the collateral. These loans can have lower interest rates because they are less risky for the lender. But if you can’t repay the loan, you will lose what you used as collateral.

 

Additional Costs in Buying Commercial Property

When buying commercial property, there are extra costs beyond the purchase price. These include:
Stamp Duty
Stamp duty is a tax you pay when you buy a property. The amount you pay depends on the property’s price and location. The rates can vary:

  • England and Northern Ireland
    • Up to £150,000: 0%
    • £150,001 to £250,000: 2%
    • Above £250,000: 5%
  • Wales
    • Up to £225,000: 0%
    • £225,001 to £250,000: 1%
    • £250,001 to £1,000,000: 5%
    • Above £1,000,000: 6%
  • Scotland
    • Up to £150,000: 0%
    • £150,001 to £250,000: 1%
    • Above £250,000: 5%

Business Rates
Business rates are taxes you pay for using property for your business. The amount you pay depends on the property’s value. You can find online calculators to help you figure out how much you need to pay.

Other Costs
Other costs to consider are:

  • Legal Fees: Costs for hiring a solicitor to handle the legal aspects of the purchase.
  • Insurance: You will need insurance to cover the building and its contents.
  • Maintenance: Regular upkeep of the property, including repairs and general maintenance.

Benefits of Owning Commercial Property

  • Potential for financial gain
  • Property value can increase over time
  • Ability to earn rental income
  • Complete control over property use and modifications
  • Possible tax benefits, such as reduced Capital Gains Tax

Risks and Drawbacks of Owning Commercial Property

  • Significant financial investment required
  • Property value can decrease due to market fluctuations
  • Responsible for all maintenance and repairs
  • Must comply with health and safety regulations
  • Property may become unsuitable if the business needs to change

Choosing the Right Financing Option

Choosing the best way to finance your commercial property depends on your business needs and situation. Here are the factors you need to consider:

  • Business Financial Health: Evaluate your current financial status to see how much you can afford to borrow and repay.
  • Future Growth Projections: Think about where you want your business to go. Pick a financing option that will support your plans for growth and expansion.
  • Risk Tolerance: Decide how much risk you can handle. Some options might be riskier but could offer bigger rewards.
  • Importance of Independent Financial Advice: Consult a reliable financial brokerage company to navigate the process smoothly and secure the best possible terms for your needs.

Conclusion

Financing a commercial property can be straightforward if you have a clear plan and know your options. Always consider your financial health, future growth, and risk tolerance, and seek advice from financial experts. With the right approach, you can secure the necessary funds to invest in a commercial property and help your business grow.