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Using a Mortgage to Buy a Business

Outlining the main benefits of using a mortgage to buy a business and the alternatives available.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 4th July 2019 *

Can I get a mortgage to buy a business?

We receive lots of enquiries asking whether a commercial mortgage can be used to buy a business and, if not, what other options would be available to finance such a purchase.

The short answer to this question is, of course, ‘yes’ you can use a mortgage to purchase a business. However, as you would expect there’s a little more to it than that and this article will outline all of the important information you need to know about the types of funding available to you.

In this article we will cover:  

Once you’ve read through all the details here, make an enquiry and we can arrange for a specialist to contact you directly and discuss your own requirements.

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What type of business can I use a mortgage for?

The type of commercial activity where mortgage lending may be available is pretty extensive. It’s highly likely that whatever type of business you’re wanting to buy or seek additional finance for, there will be a lender who will be able to help you.

As the name suggests, a business mortgage is basically a mortgage required for business purposes - for buying into a business, purchasing premises, renovations or refinancing existing arrangements.

There are generally two types of business mortgage:

  • Owner-occupier mortgage (for purchasing property to be used as your business premises)
  • Commercial investment mortgages (for businesses buying property to rent out)

The type of property which can be considered for a business mortgage could include:

  • Shops or retail outlets
  • Restaurants
  • Office blocks or apartments
  • Schools or colleges
  • Hotels or Guest Houses
  • Nursing or Care homes
  • Agricultural property - farm buildings/land
  • Professional properties - solicitors, medical centres

If you’d like to understand more about the different types of business you can use a commercial mortgage for make an enquiry to speak with an expert.

What is the eligibility criteria for a business mortgage?

Every lender will assess each business mortgage application it receives on a case-by-case basis. In a broad sense, when deciding whether you can buy a business using a mortgage the following factors would be considered.

Affordability

In order to establish whether a business can adequately service the mortgage debt most commercial lenders will review its operating performance by looking at earnings before interest, tax, depreciation and amortisation (EBITDA).

The information gleaned from the EBITDA analysis must give the lender sufficient confidence that the business is producing sufficient profit to afford the monthly mortgage payments.

Deposit

Most lenders require a deposit of between 20%-40% for commercial mortgages depending upon the level of risk they deem to be taking and the type of mortgage requested.

For an owner-occupied mortgage most lenders will require a deposit of between 20%-30%. For a commercial investment mortgage most lenders will require deposits of 25% although some may accept lower.

However, depending upon the level of security a business may be able to provide, there are some lenders who may consider lending up to 100% of the commercial property’s value.

Credit rating

If you or your business has a poor credit rating this can cause issues with how much a lender may be prepared to let you borrow (if at all). This will usually depend upon the type of issue you’ve had and when it was registered.

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

For more information on this see our bad credit commercial mortgages article.

Alternatively, make an enquiry and we can arrange for an advisor we work with to contact you directly and discuss further.

Viability of the business

A lender will gain confidence from your 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 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 payments.

How do I get a mortgage to buy a business?

Each lender will use their own criteria when assessing the factors outlined in the previous section. With this in mind, trying to establish which lender will accept what can prove to be incredibly difficult and frustrating.

The best way to cut through the information to find a lender who will best match your business mortgage requirements is by using a whole of market broker who will be well versed with what each lender’s criteria is and can complete this research for you.

In addition, it is important that you can answer each of the above eligibility requirements as positively as possible in order to gain the confidence of a lender when assessing your application.

We work closely with a number of brokers who will be able to assist you in your search for the right business mortgage. If you make an enquiry we can arrange for an expert to get in touch and discuss further.

What are the alternatives to using a mortgage to buy a business?

In addition to business mortgages, there are a number of other forms of commercial lending which could help you buy a business.

These include:

Unsecured business loan

If the amount required to buy your business property is an amount below £25,000 it may be more viable to consider a shorter term option such as a business loan which would not require any security for the lender and could be arranged fairly quickly.

This might be viable if you already have capital to invest, but need extra funds to complete the deal.

If the amount you require is larger than £25,000 the options outlined below may be more suitable alternatives to a business mortgage, depending on your circumstances.

Bridging loan

If you need funds to buy your business quickly (perhaps your buying premises through an auction or competing with another interested party) then bridging finance may be a solution as this form of borrowing is designed for such situations.

As the name suggests, bridging finance is 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’d like to know more about bridging loans you can read all about this type of lending here.

Using a remortgage to buy a business

This could be an option to consider if you have sufficient equity in your existing premises or a large portfolio of business investment properties and hold sufficient equity in them. Refinancing to release this equity could give you the capital you need to invest in a new business.

This could also gain traction from lenders if other areas of eligibility have not yet evidenced 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.

Can I use a business mortgage to buy a house?

If your intention is to live in the property then a residential mortgage would need to be used rather than a business mortgage.

There may be some exceptions to this, for example, if you were buying a bed and breakfast guest house and your living space made up less than 40% of the entire area of the property. If this is the case then a business mortgage could be considered.

Moreover, if you’re interested in a property that has a mix of residential and commercial space (e.g. a shop with a flat above it), a semi-commercial mortgage is what you would need.

Why you should speak to a business mortgage broker

At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:

  • Have whole of market access
  • Can offer bespoke advice on commercial transactions
  • Have excellent relationships with business lenders
  • Are OMA accredited advisors
  • Have completed a 12 module LIBF accredited training course

Speak to a business mortgage expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 4th July 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

Find out more about commercial mortgages

Commercial Mortgage Guide