Own your business and your business premises – a brief guide

For some business types, for example retailers, manufacturers or office-based companies, there will come a time when it makes sense to consider giving up renting premises and buying your own. The current property price dips are also being reflected to some degree in the cost of commercial property so this year could be the time to take the initiative.

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So how do you get started? This is a quick, general guide to buying a commercial property, which should always be followed up with professional advice.

What is a commercial mortgage?

A commercial mortgage is not dissimilar to a residential mortgage, however the lending criteria will be based on your business finances rather than your personal income.

Commercial mortgages run for between 5 and 25 years, the length of which usually determines the interest rate you will pay. Most lenders will expect to receive 20%-30% of the asking price as a down-payment, so you may need to look into other finance options, such as factoring or loans if you are short on capital.

If possible, it is a good idea to form a separate business entity before purchase so that you can lease the building to your operating company once the property completes. This separate entity should arrange for a non-recourse mortgage for the purchase of the property by your operating company. Doing so would go some way towards protecting your operating business if it defaults on the mortgage. It is advisable to consult your accountant or tax advisor on this subject.

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There are pros and cons to buying a commercial property:

Advantages:

• Your mortgage repayment is likely to be similar to a rental payment on the same property
• You aren't exposed to any hefty rent increases
• You may be able to sub-let any free space, although you will almost certainly require permission from your lender to do so
• Interest payments on a commercial mortgage are tax-deductible and any gain in value of the property will increase your capital
• It improves cash flow management as the mortgage payments can be pre-set
• Retail properties sometimes come with residential apartments or office space on the floor(s) above. This could be rented out, or you could sell your residential property and move into your commercial property.

Disadvantages:

• Unlike renting, you'll need to come up with a substantial deposit - this is money that might otherwise be used for more important business purposes.
• If you own premises you may find it harder to relocate your business, because selling business premises is not always easy. If you rent, you may be able to negotiate to end your rental agreement, or to find another organisation to take over your tenancy.
• If you have a variable rate mortgage, you are exposed to increases in interest rates.
• Owning a property means you'll be solely responsible for things such as maintenance, fixtures and fittings, buildings insurance, decoration and security.
• Any loss on the value of the property will decrease your capital.

Find quotes for commercial mortgages, as well as landlord's insurance and small business insurance.

Find commercial mortgages online

This article was first published on Simply Business

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