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Where To Source Commercial Mortgage Finance

This is the first in a series of articles designed to help readers better understand where to obtain commercial finance, the process of getting a commercial mortgage, and how to raise funds in the shortest time, and most cost effective manner.

Lender Options For Small And Medium Enterprises (SMEs)

High Street Banks are the main source of commercial finance in the UK, especially for large transactions.

These institutions will prefer to lend to companies with strong trading histories, a consistently positive balance sheet, and well written business plans and forecast projections.

However, the conservative approach adopted by High Street Lenders means that there are many SMEs unable to secure finance from this source.

Small businesses managing to obtain finance from the High Street often give up control over other business or personal assets, required as additional securities, such as charges over Company Director's properties.

The advantages of signing a commercial mortgage with a High Street lender are:

Marginally lower interest rates
Shorter-term redemption penalties

The disadvantages are:

Takes longer to process the application
Much information has to be provided
Possible 2^nd charges over other assets
Many applications will not succeed

Specialist Commercial Lenders

The second group of lenders are the specialist lenders. This lender community is split into two categories:

Commercial Mortgage Lenders

These are often subsidiaries of international finance houses which appeared in the market five to ten years ago, answering the financial demands of companies not serviced by the High Street.

They typically lend to small, young businesses, and companies who have had some financial difficulties in their past. However, the key difference with these lenders is that their lending decisions are almost always based purely on the property value (bricks and mortar) and NOT the track record of the business itself.

They have two basic offerings:

Status based mortgages - where company accounts are taken into account

Non-status self-certified mortgages - where minimal supporting documentation is required

Of these two choices, many small businesses opt for self-certified commercial mortgages.

Self-Cert Mortgage "decisions in principle" are usually awarded on the day a completed application is submitted, and finance is released in a very short period of time, often in less than 30 days.

This is possible because there is less business analysis to be performed, and the time it takes to release the money will be dependent on the time it takes for lawyers to work through the legalities, and not analysis of the business itself.

Mortgages offered by this lender panel will also cover commercial premises with flats above, and other non-standard properties – common in catering related business environments.

Interest rates start at around 2% above base and rise to around 6% over base.

Advantages:

Much faster/easier to obtain finance

Requires little/no supporting business information

Competitive interest rates

Disadvantages:

Slightly higher rates than High Street Banks

Longer early redemption overhang

Speculative Lenders

This category of lender will invest in speculative projects, such as development of brown field sites into new housing estates etc. The way they structure their finance offerings varies on a deal by deal basis, with commissions, and/or interest, being largely back-end weighted.

These lenders may be of interest to land owners engaged in speculative development projects.

Other Lender Options

Typically, the most common source of mortgage finance is the Building Society. This is true for residential mortgages, however, legislation only allows Building Societies to lend up to 25% of their totally investment reserves for non-residential mortgages or investments.

Consequently, Building Societies generally either specialise in commercial mortgages for less risky markets (e.g. professional practices), or lend at conservative loan-to-values, and with slightly higher rates than the High Street.

Typically, the advantages and disadvantages of a Building Society mortgage are similar to those of High Street lenders.

About the Author

Rosie Beasley is a Director of TAL Commercial, the commercial finance division of Tudor Associates Limited (FSA 416033).

TAL Commercial Consultants specialise in building considered and cost-effective commercial mortgage finance solutions for UK SME businesses. TAL Commercial are members of the Chamber of Commerce and various SME industry bodies, including NCASS.

For further information about TAL Commercial, commercial mortgages, or complimentary business finance solutions, please visit our website www.tal-commercial-mortgages.com, or call 0845 643 0260 for a free consultation.