A commercial or business mortgage loan is a financing option for businesses that want to buy property or land for their office or workspace. It can be a good choice for companies that have outgrown their current space or are facing expensive increases in rent.
Talking to a financial advisor before seeking this type of loan is advisable. In addition, be prepared to provide extensive documentation and a lot of detail to the lender.
Property Value
Property value is one of the most important aspects when applying for a commercial mortgage. It allows investors to establish how much a property is worth and ensures they spend a reasonable amount of money.
A variety of factors determines property values. These include neighborhood desirability, proximity to public transportation, crime rates, and local amenities.
Other factors used in determining property value include net operating income and capitalization rate (or cap rate). The latter is a ratio that compares a real estate investment’s potential return to its open-market price and is considered a standard valuation method.
Income
A commercial mortgage is a secure way to provide access to business capital. Whether paying expenses, wages or taking advantage of growth opportunities, a commercial mortgage can be a viable option for many businesses.
Unlike residential mortgages, several types of commercial loans with interest rates can vary dramatically. Additionally, some lenders might demand a bigger down payment than others.
Lenders are often risk-averse and want proof that you can afford debt payments. They usually ask for three or more years of company accounts, payslips, and other financial documents.
Debt to Income Ratio
The debt-to-income ratio is a crucial factor lender consider when assessing whether or not you can afford a commercial mortgage. This ratio considers your monthly debt payments, including rent or mortgage payments, student loans, auto loans, credit card minimums, insurance premiums, and child support or alimony.
Lenders typically prefer a front-end DTI of 28% or lower, meaning that no more than 36% of your income would go towards housing expenses and debt payments. In addition, a back-end DTI of 36% or lower is considered a manageable number.
Credit Score
An important consideration while applying for a commercial mortgage. A credit score is a number that represents an individual’s level of risk as a borrower and is based on information in their credit report.
You may be eligible for better loan conditions with a strong credit score. Factors that influence your score include payment history, types of accounts, and the amount of outstanding debt you have. A low credit utilization rate (the percentage of available credit you use) and the length of your credit history are also significant.
Cash Flow
Cash flow is the amount of money a business brings in or spends during a reporting period. It is typically broken down into cash flow from operating activities, investing activities, and financing activities on the statement of cash flows, standard financial information.
Cash flow differs from net profit, which measures the amount left over after all expenses and debts have been paid. A positive cash flow when applying for a commercial mortgage is essential, as it shows you can repay your monthly payments.
Location
Find the best commercial mortgage rates by comparing offers. Lenders have different risk appetites; some specialize in lending to specific business sectors.
You may also find a part-commercial mortgage suitable for you if your business is looking to buy a property that is half business and half residential (such as a flat above a pub or a shop). This type of commercial mortgage falls outside of standard residential mortgage lender terms and requires a unique mortgage product.
Buying your business premises has many advantages over renting. Besides saving money on rental fees, you can benefit from tax deductions and capital appreciation.
Lease Agreement
A lease agreement is a legal document that allows one party to use an asset, like a property or equipment, for a set time in exchange for monthly payments. The lease terms can be concrete and should include all the names of those agreeing – including co-signers.
A lease agreement should also include the length of the term, how much the rent will be, and who is responsible for utilities. It should also address additional fees, such as arrangement or valuation fees.
