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Commercial Advantages and Disadvantages: A Clear Overview

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If you’re looking to mortgage a commercial property, it’s important to understand the advantages and disadvantages of business mortgages compared to other forms of borrowing. This guide will help you make an informed decision about the type of financing that’s right for your business.

We’ll explore the key differences between commercial and residential mortgages and weigh up the pros and cons of business mortgages. Whether you’re a small enterprise or a larger corporation, understanding the different options available to you can help you make the right decision for your business.

Key Takeaways

  • Consider the advantages and disadvantages of commercial mortgages before deciding whether to take out a business loan
  • Speak to an expert on commercial mortgages to help you make an informed decision
  • Understand the key differences between commercial and residential mortgages to choose the right financing option for your business.

What Are the Advantages and Disadvantages of Commercial Mortgages?

Getting a Owner-occupier Mortgages vs Renting a Business Premises

When considering a commercial mortgage, it is important to weigh up the advantages and disadvantages of an owner-occupier mortgage for a business compared to renting a commercial property.

What Are The Advantages of an Owner-occupier Commercial Mortgage

Taking out an owner-occupier commercial mortgage has several benefits over renting, including:

  • Commercial mortgage repayments are often similar to rental payments for the same business property.
  • There is no risk of unexpected rent increases.
  • You can sublet any extra space in the property to generate rental income with lender permission.
  • You have control over alterations to the building and can extend the premises if your business grows, avoiding potential relocation costs.
  • Interest payments on commercial mortgages are tax-deductible.
  • If the property gains value, your firm’s capital will increase.

What Are The Disadvantages of an Owner-occupier Commercial Mortgage

However, there are also potential drawbacks of taking out an owner-occupier mortgage rather than renting, such as:

  • A substantial deposit is needed for a commercial mortgage, usually 25-40%.
  • It may be more difficult to relocate as selling a business premises can be more complicated than negotiating an end to a rental agreement.
  • There may be extra expenses to foot such as repairs to the building, security, insurance costs, fixtures and fittings.
  • Your capital could take a hit if the value of the property declines.

To make the right decision for your business, it is important to assess how much risk is involved. If you’re concerned that any of the above disadvantages might apply to your business, get in touch with commercial mortgage brokers who can connect you with the right commercial mortgage lender or suggest potential alternatives.

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Speak to our expert on commercial mortgages

If you have questions about commercial mortgages, it’s best to speak with an expert. Access a variety of lenders. Our brokers are knowledgeable in commercial mortgages. Ask any questions you may have and get the best advice for your unique circumstances.

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Getting a Business loans versus commercial mortgages

If you are considering financing your business, you may be wondering whether to choose a commercial mortgage or a business loan. Here are some factors to consider:

Should I get a commercial mortgage or a business loan?

A business loan may be a more cost-effective option if you only need to borrow a certain amount to buy a property. It may be worth considering a business loan if:

  • The amount you want to borrow is less than £25,000.
  • You want to borrow on an unsecured basis.
  • You want to repay the debt over the course of less than three years.

On the other hand, a commercial mortgage may be a better choice if you need to borrow a larger sum of money or if you want to borrow over a longer period. Commercial mortgages offer lower interest rates than unsecured business loans because they are secured against the property you are buying.

Which one is more expensive; commercial mortgages or business loans?

Not necessarily. While business loans may be cheaper for smaller amounts, secured business loans can also be expensive. Interest rates for commercial mortgages tend to be lower than those for unsecured business loans, but they may be higher if you are taking out a secured loan to buy a property.

Getting a Commercial remortgage vs business loan

If you are considering refinancing your commercial mortgage to borrow more, you may want to consider a business loan as an alternative. If you need to borrow £25,000 or less and are comfortable with unsecured borrowing, a business loan may be a better option.

Which option you choose depends on which lender offers you the most favourable interest rates. As both commercial mortgages and business loans are bespoke, lenders will base the deal on the level of risk after looking into your business’s profitability, credit history, and trading history, among other factors.

Getting a Small business loans vs mortgages

Commercial lenders generally treat smaller businesses in the same way as larger operations, offering them the same products, rates, and loan-to-value ratios (LTV), assuming they pass the eligibility and affordability checks. Therefore, all of the information in the previous sections applies to small businesses and small business owners.

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Getting a Commercial Mortgages vs Buy-to-Let

If you’re planning to let a property for business purposes, you’ll need a commercial investment mortgage. On the other hand, if you’re renting the property to residential tenants, you’ll need a standard buy-to-let mortgage. You can find more information about residential buy-to-let mortgages in our buy-to-let mortgages guide.

Which one has better rates; Commercial Mortgage vs Residential Mortgage

Commercial mortgage rates are typically higher than residential mortgage rates. Commercial mortgage rates are determined on a case-by-case basis and are tailored to the individual or business that is applying for a mortgage, determined by the level of risk. Residential lenders, however, decide what their rates are in advance and will decide whether to offer their most favourable deals after assessing a borrower’s profile.

Why are commercial mortgage rates higher than residential? To put it simply, because commercial mortgages are generally seen as higher risk. The interest rate you will end up with will be determined by just how risky the lender thinks the investment is, and they will calculate this based on the following factors:

  • The loan to value ratio: Typical deposit requirements range between 25% and 40% in the commercial sector, but generally speaking, the more you can put down, the lower the level of risk as lenders prefer lower LTV deals.

  • Credit history: The best rates may be harder to come by if you or your business have bad credit as some lenders prefer borrowers to have no credit issues on their file.

  • Trading history: Some lenders will consider the deal risky if your business has no (or little) trading history as there are commercial mortgage providers who prefer borrowers with a strong track record in the industry in question. There are, however, specialist providers who cater for new investors and start-ups.

  • Profitability: Commercial lenders determine affordability by assessing a business’s operating performance, i.e. looking at their earnings before interest, tax, depreciation and amortisation (EBITDA). There’s no hard and fast rule about how much you can borrow based on these figures, but the more confident the lender is that the mortgage is serviceable, the more likely they are to offer favourable rates.

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Speak to our Commercial mortgage specialist about the Pros and Cons of Business Mortgages

If you’re considering a commercial mortgage, it’s important to speak to an expert who can guide you through the process and help you weigh the pros and cons. A commercial mortgage broker can provide invaluable advice on the best mortgage products available and help you navigate the complex application process.

By working with a commercial mortgage broker, you can benefit from their expertise and access a wider range of mortgage products than if you were to go it alone. Plus, our service is completely free, with no obligation or impact on your credit rating.

If you have any questions about commercial mortgages, don’t hesitate to get in touch with us today. We’re here to help you find the right mortgage product for your business.

Frequently Asked Questions

Benefits and Drawbacks of Using Agents and Distributors in Business

Using agents and distributors can help expand your business reach and increase sales. Agents and distributors have established networks and knowledge of the local market, which can save you time and money. However, they may not be as invested in your business as you are and may not prioritize your products over their other clients. Additionally, you may have less control over how your products are marketed and sold.

Pros and Cons of Having Fixed Premises for a Business

Having a fixed premises can provide stability and a professional image for your business. It can also help with inventory management and customer service. However, it can be expensive and limit your flexibility to move or expand. Additionally, you may have to deal with maintenance and security issues.

Advantages of Agents and Brokers in Commercial Transactions

Agents and brokers can provide valuable expertise and knowledge in commercial transactions. They can help negotiate deals, provide market insights, and assist with paperwork and legal requirements. Additionally, they can help establish trust between buyers and sellers.

Disadvantages of Using Commercial Agents in Business

Commercial agents may have conflicting interests or limited knowledge of your specific industry. They may also charge high fees or commissions, which can eat into your profits. Additionally, they may not be as motivated to sell your products as you are.

Advantages and Disadvantages of Buying Business Premises

Buying business premises can provide long-term stability and investment opportunities. It can also give you more control over the property and the ability to customize it to your specific needs. However, it can be expensive and risky, and may tie up your capital. Additionally, you may have to deal with maintenance and repairs.

Benefits and Drawbacks of Advertising a Business

Advertising can help increase brand awareness and attract new customers. It can also help differentiate your business from competitors and build trust with potential customers. However, it can be expensive and may not always provide a clear return on investment. Additionally, it can be difficult to measure the effectiveness of advertising campaigns.

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Legal Information & Disclaimer

This site is an information only site. All of our articles are written by authorised mortgage brokers for the only aim of providing great, useful, mortgage and loan related information. We intent to offer the best possible suggestions and guides however can’t always guarantee to be perfect, please use the information at your own risk. We can’t accept responsibility if things go wrong. Please contact us via our contact page if you see anything that requires changing and we will do so as soon as possible.

The articles on our site do not provide financial advice. Instead, they aim to equip you with the necessary information to attain your mortgage objectives. 

** The content provided in this page is correct at the time of writing. Mortgage and loan lender’s qualifying criteria and rules change frequently so speak to an adviser to confirm the most up to date rules and criteria. The content on the website is not specific advice to each reader, and does not constitute financial recommendations.