Every mortgage lender will have different criteria, but there are some things they all have in common.
Commercial mortgages enable a business to buy property as part of its asset portfolio. As with any mortgage, this can be a major undertaking for a company, but the reasons for doing so are sound: usually, a company will pay less on a mortgage than they will on rent and be on the road to owning an asset that will grow in value over time.
Businesses find that a specialist mortgage broker will help them to understand the different requirements of each lender in the market at any particular time. At the start of the process, though, there are five key things lenders will want to see in any application.
1. Credit and personal history or work experience of all key people in the business
Lenders will want full visibility of your financial history to understand you and to find the best solution for your business. They will also be reviewing the experience and background of the borrowers as well as their financial standing. An up-to-date CV and statement of assets and liabilities plus income and expenditure (ALIE) is a great way to demonstrate this.
The management team and/or key employees will also be reviewed. Understanding these points and having transparency in these areas from the beginning will make the whole process much smoother.
2. The type of business or property you wish to purchase or refinance
Different lenders have different appetites. Some love supporting leisure and hospitality businesses, while others prefer care homes or businesses that have a positive social impact. Still others favour commercial investment property over owner-occupied commercial mortgages. Each lender is different.
A broker will want to understand your goals and priorities to help navigate you through the process and obtain the best possible outcome for you and your business. Being clear with your ambitions and intentions from the start allows them to provide you with tailor-made solution/s, valuable support and guidance that is suitable for you.
3. Are you able to repay the money you borrowed from a sustainable income stream/s?
This is one of the most important pieces of information that lenders will look at when assessing applications for commercial mortgages and secured loans. Financial transparency aids your business because it highlights whether a commercial mortgage would be a high or low-risk investment for a lender.
Traditional lenders like to see the last three years’ accounts and up-to-date management accounts for the current trading period. Having this confirmation of income prepared and readily available will speed up the process, though as a snapshot in time, the numbers only tell half the story. A knowledgeable and professional broker will explain the movements in these numbers and provide a lender with comfort that the income is sustainable to service the debt over the life of the loan or mortgage.
If you don’t have three years accounts, don’t give up: finance options are available against projections from non-traditional lenders. Again, a good broker will be able to explain and justify to a lender why the forecast turnover and profit are realistic and achievable. These types of facilities are classed as a higher risk for lenders, therefore expect to pay higher interest rates.
4. The proposed loan-to-value (LTV)
The loan-to-value ratio is an assessment carried out to measure a lender’s exposure as a percentage of the property value they are taking as security. This is important as it tells lenders what position your business is in financially, to assess if you are high or low risk. The higher the LTV, the higher the lender’s perceived risk is, therefore it will be more expensive for borrowers.
Banks and lenders also work on different types of LTV. There is ‘open market value as a going concern’ for trading entities, there is ‘freehold vacant possession value’, ‘restricted value based on vacant possession and a defined sale period of 9, 6 or 3 months’. SMEs and Property Professionals aren’t expected to know which lenders use which mechanism to establish the LTV. That is the job of your broker to navigate you through the market and explain the position to you and provide options based on your unique set of circumstances.
5. Investment, bridging and development finance
If your business specialises purely in owning, developing, investing, and refurbishing a property, you will have no doubt heard about bridging finance and development finance. This is still a relatively new area, so utilising the knowledge and experience of a broker who knows and understands the market will be important to you and your business.
These lenders will be keen to understand your exit route: how are you going to repay their short-term loan? A solid solution and explanation here are needed, as this is a vital part of the puzzle for lenders to understand when advancing bridging or development loans. Have your plan in place and a ‘Plan B’ in case things don’t work out as expected.
For the lender, agreeing to a mortgage or loan is a considerable risk, and they will want a return on their investment. There will almost certainly be more information that they need to reach a “yes” but the five points above are a foundation for any application.
As with any financial transaction, transparency will enable you to get the most valuable support and guidance throughout the process.