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Using a Mortgage to Buy a Business: A Comprehensive Guide

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If you’re considering buying a business, you may be wondering whether you can use a mortgage to fund the purchase. Using a mortgage to buy a business can be a great option, as it allows you to spread the cost of the purchase over a longer period of time and can help you to secure the funding you need.

In this article, we’ll outline the main benefits of using a mortgage to buy a business and the alternatives available. We’ll also cover what type of businesses you can use a mortgage for, the eligibility criteria for a business mortgage, and how to get a mortgage to buy a business. Additionally, we’ll explore how else you can borrow money to buy a business and what your monthly repayments could look like. Finally, we’ll answer some frequently asked questions and provide you with some key takeaways to help you make an informed decision.

Key Takeaways

  • Using a mortgage to buy a business can be a great option, as it allows you to spread the cost of the purchase over a longer period of time and can help you to secure the funding you need.
  • There are eligibility criteria that you’ll need to meet in order to qualify for a business mortgage, and you may want to speak to a commercial mortgage expert to help you navigate the process.
  • There are alternative options available for borrowing money to buy a business, and it’s important to consider all of your options before making a decision.

How to get a mortgage to buy a business?

Yes, you can use a mortgage to purchase a business. However, the type of mortgage available to you will depend on the nature of the business you want to buy. If the business is a commercial enterprise, you will need to apply for a commercial mortgage. If the business is semi-commercial, you may be able to apply for a semi-commercial mortgage.

To be eligible for a commercial mortgage, you will need to meet the lender’s criteria. This will typically include providing evidence of your ability to make repayments, as well as demonstrating that the business you want to buy is a sound investment. You will also need to have a deposit, typically around 25% of the purchase price.

If you are unable to secure a commercial mortgage, there are other options available to you. These may include taking out a loan from a commercial lender or mortgage provider, or exploring other forms of finance.

It is worth noting that you cannot use a business mortgage to buy a house. Business mortgages are specifically designed to finance the purchase of commercial properties.

To get an idea of what your monthly repayments could look like, you can speak to a business mortgage expert who can provide you with more information on the different types of business mortgages available and help you find the best deal for your needs.

The Mortgage Types You Can Use For Business

If you’re looking to buy a business, commercial mortgages can be used to finance the purchase. These mortgages can also be used for purchasing business premises, refinancing existing arrangements, or renovations. There are two types of business mortgages: owner-occupier mortgages, used for purchasing property to be used as your business premises, and commercial investment mortgages, used for buying property to rent out.

The type of property that can be considered for a business mortgage is extensive and can include shops, restaurants, office blocks, schools, hotels, guest houses, nursing or care homes, agricultural property, and professional properties like solicitors and medical centres.

There are many lenders who can help you get a mortgage for your business, so it’s highly likely that you’ll find one that suits your needs.

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Speak to Our Commercial Mortgage Expert

If you have any questions or concerns about commercial mortgages, it’s always best to speak to an experienced commercial mortgage broker. They can provide expert insights and help you find the right mortgage for your business needs. Simply ask us a question and we’ll come back to you to help.

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The eligibility criteria for a business mortgage

When applying for a business mortgage, lenders will evaluate each application on a case-by-case basis. However, there are several factors that are generally considered when deciding whether to approve a mortgage application.

How Does the Affordability Calculated

Commercial lenders typically review a business’s operating performance by analyzing its earnings before interest, tax, depreciation, and amortization (EBITDA) to determine whether it can adequately service the mortgage debt. The lender will need to be confident that the business is generating enough profit to afford the monthly mortgage payments.

What Level of deposit do I need?

Most lenders require a deposit of between 20% to 40% for commercial mortgages, depending on the level of risk and the type of mortgage requested. For an owner-occupied mortgage, the deposit required is usually between 20% to 30%. For a commercial investment mortgage, the deposit required is typically 25%, although some lenders may accept lower.

Can I buy a business with no money?

If a business can provide sufficient security, some lenders may consider lending up to 100% of the commercial property’s value. However, to borrow all the necessary funds, you will most likely need to secure the loan against a property or asset you already own and hold sufficient equity in.

Credit Score

If you or your business has a poor credit rating, this can negatively impact how much a lender is willing to lend you (if at all). The severity of the issue and when it was registered will usually determine whether you can obtain a commercial mortgage.

There are specialist adverse credit lenders who cater to businesses that may have experienced various forms of bad credit or have been unable to create a sufficient credit profile to gain acceptance with a mainstream bank or building society.

Business Trading History

Lenders will gain confidence from your mortgage application if they can see that you have extensive experience in your particular business niche and a solid trading record over a number of years. The majority of lenders will want to see the previous 2-3 years’ trading accounts for the business you are looking to buy or raise finance for. However, some lenders may accept less than this.

For a commercial investment mortgage, a lender will want to see the projections for the amount of rental income the business is seeking to generate and that this profit will adequately cover the monthly mortgage.

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You Can Get a Mortgage to Buy a Business

To get a mortgage to buy a business, the first step is to find a commercial mortgage broker with experience in this area. A broker can help you get approved at the best terms available. You can speak to us straight away by simply making an enquiry online. We can help you in readying all of the necessary paperwork, downloading your credit reports, and finding the right lender and securing the best deal for you.

It’s important to have a solid business plan, complete due diligence, and have an accountant review your financial records and systems. These steps can help you get approved for the mortgage and secure the best deal for your business.

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Alternative borrowings to buy a business

In addition to business mortgages, there are other forms of commercial lending that could help you buy a business. These include unsecured business loans, bridging loans, and using a remortgage facility.

Borrowing Unsecured business loan

If you need a smaller amount of capital to buy your business property, a shorter-term option like an unsecured business loan could be a good choice. This loan would not require any security for the lender and could be arranged quickly. This option might be viable if you already have capital to invest but need extra funds to complete the deal.

Borrowing Bridging loan

If you need funds to buy your business property quickly, a bridging loan may be a solution. This form of borrowing is designed for such situations. Bridging finance acts as a ‘bridge’ between a purchase and a clearly defined exit strategy. This could mean that by the end of the bridging loan term (usually 12-36 months), you decide to refinance your lending through a commercial mortgage or you intend to sell your business. If you want to know more about commercial bridging loans, read through our guide.

Using a refinancing to buy a business

If you have sufficient equity in your existing premises or a large portfolio of business investment properties and hold sufficient equity in them, remortgaging to release equity could give you the capital you need to invest in a new business. This option could also gain traction from lenders if other areas of eligibility have not yet evidenced that the new mortgage payments are affordable.

These are just a few options that are available as alternatives to business mortgages. The brokers we work with can discuss all of these options, and others, in more detail. Make an enquiry and we can arrange for an expert to get in touch.

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Can You Use a Business Mortgage to Purchase a Home?

If you plan to live in the property, a residential mortgage would be required instead of a business mortgage. However, there are some exceptions. If you are purchasing a bed and breakfast guest house and your living space accounts for less than 40% of the total area of the property, a business mortgage could be considered. Additionally, if you are interested in a property that has a combination of commercial and residential space, such as a shop with a flat above it, a semi-commercial mortgage would be required. It is important to consider your specific circumstances and consult with a mortgage advisor to determine the most suitable mortgage for your needs.

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Frequently Asked Questions

What types of mortgages are available for purchasing a business?

When it comes to purchasing a business, there are several types of mortgages available, including commercial mortgages, buy-to-let mortgages, and bridging loans. Commercial mortgages are specifically designed for business purposes, while buy-to-let mortgages are intended for those who want to purchase a property and rent it out. Bridging loans are short-term loans designed to bridge the gap between the purchase of a new property and the sale of an existing property.

How can a business obtain a mortgage for a property purchase?

To obtain a mortgage for a property purchase, a business will need to provide proof of income, assets, and liabilities. The lender will also want to see a business plan, financial statements, and tax returns. In addition, the lender will consider the credit history of the business and the individuals involved in the purchase.

What are the current business mortgage rates?

Business mortgage rates can vary depending on a variety of factors, including the type of mortgage, the size of the loan, and the creditworthiness of the borrower. Generally, commercial mortgage rates are higher than residential mortgage rates, but they can still be competitive. It is important to shop around and compare rates from different lenders to find the best deal.

What is the process for obtaining a commercial mortgage?

The process for obtaining a commercial mortgage involves several steps. First, the borrower will need to provide the lender with information about the business, including financial statements and tax returns. The lender will then review the information and determine whether the business is a good candidate for a mortgage. If the lender approves the loan, the borrower will need to provide additional documentation, such as property appraisals and title searches. Finally, the lender will close the loan and disburse the funds.

Can a business run from a mortgaged property?

Yes, a business can run from a mortgaged property. However, the terms of the mortgage may include restrictions on the use of the property. For example, the lender may require that the property be used solely for business purposes and may prohibit residential use.

Is it difficult to secure a mortgage for a business purchase?

Securing a mortgage for a business purchase can be challenging, as lenders typically require more documentation and have stricter underwriting standards than they do for residential mortgages. However, with a solid business plan, good credit history, and sufficient collateral, it is possible to obtain a commercial mortgage at a competitive rate. It is important to shop around and compare rates from different lenders to find the best deal.

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