Tips for Completing a Commercial Property Mortgage Application

Commercial mortgages are the ideal solution for people who need to acquire real estate such as land to set up business facilities such as a manufacturing plants, office space, space for staff quarters, etc. With commercial mortgages, the property purchased with the loan is held as collateral by the lender.

Even during this ongoing recession, getting approval for commercial mortgages is easier when compared to home mortgages. But to make sure you get an easy approval, it is essential for you, as the borrower, to have a solid business plan in hand, proper business papers, credit report and details on the financial viability of the property you are interested in buying.

Here are some tips to help you get approval for any commercial property mortgage application:

• As there will be minute scrutiny of all the papers, make sure that you are submitting the correct papers. One wrong paper can jeopardise your chances of getting a commercial mortgage loan.
• Before filling the application form keep the balance sheets, tax documents, and sales records in a systematic way so as to highlight the smooth running of your business.
• Keep the latest income tax returns regular and complete as you would be required to show at least two previous years tax returns.
• Keep a record of your bank statements for the last three months.
• If you are looking at refinancing your commercial property loan, furnish all of your pay off statements, survey, title policy, and appraisal.
• Prepare the costs of the new property you wish to buy along with the insurance schemes in case you fall behind your goals.
• Have the latest personal credit report prepared as a proof to show your capability of paying off a commercial mortgages loan in time.

Last but not least, always deal with a reputed commercial mortgages lender to get the loan approved in time.

5 Key Points a Borrower Must Know About Applying for a Commercial Mortgage

In UK the commercial mortgage is a popular way of raising required funds for purchasing assets related to business, property finance or for the expansion of the business. As commercial mortgages are secured by collateral, it is essential for you as a borrower to consider all the aspects properly before applying for a commercial mortgage. This is important because the lender can use the collateral to recover the loan in case you are not able to repay the loan in time.

In a commercial mortgage your property is at stake and during this ongoing recession it is difficult to correctly predict market trends. Hence it is better to plan properly before applying for any commercial mortgages with UK-based companies. Besides, the recession has cast its impact almost everywhere and laws governing commercial mortgages tend to be broadly similar, which makes it imperative for one to plan out the moves carefully.

Here are some points which can help you plan properly before applying for a commercial mortgage loan in the UK.

1. Clear Knowledge - Before applying for a commercial mortgage loan you must be clear about the specifics of land or building for which you are going to apply for the loan. You need to have clear knowledge on the feasibility of the cost, the particular piece of property’s appreciable value and how exactly the asset in question can add value to your business.

2. Right Lender - Find the right lender for the best commercial mortgage rates and terms. There are basically two sources of commercial property mortgages - banks and third-party lenders. While banks have rather stringent procedures, third party loans can be a little costly. Thus, it is always better to do a self assessment and check out which one will do best for you.

A hint – if you have any negativity in your track record or financials, banks will steer clear of your case.

3. Next is the process of filling in the loan application. You must carefully fill in various details with correct information and explain the reasons for applying for the commercial mortgage clearly and honestly.

4. Provide proper documents to support what you have written on the application. Documents can be in the form of operating statements, bank records, tax returns and corporate financials.

5. As there are a lot of legal formalities associated with a property transaction, it is better to take the help of a competent commercial mortgage advisor in the UK to help you out at presenting and interpreting legal documents while applying for a commercial mortgage loan.

Business asset finance types

As the world economy slides deeper into recession, businesses are scrambling to improve efficiency, cut costs, and retain customers to survive this downturn.

One of the biggest challenges businesses are facing at the moment is to maintain low costs yet offer new technology products to retain and enhance their customer base. Needless to say, new product offerings require investment in new equipment. But not many businesses in today’s scenario will be able to do so as for most, their reserves are either dwindling or are fiercely protected and bank loans are hard to come by.

However, even in these circumstances businesses can get necessary equipment by opting for business asset finance. Asset finance is the option used by businesses the world over to equip their operations with business critical assets.

Asset finance primarily comprises of the following types:

Operating Lease

The asset is rented out for an agreed period (usually one to five years) and the lessee pays a fixed amount as rental. At the end of the term, the asset is returned to the lessor or if the requirement is such, the lease is extended.

Contract Hire

This is used mostly for vehicles and the rental is calculated on the basis of the residual value of the asset over a predetermined period. It thus includes the cover for the depreciation too. This asset finance option is like an operating lease but may differ in terms of maintenance, replacement during repair, management, etc.

Finance Lease

In this type of lease, the leasing payments are calculated to include the full cost of owning the asset. There can be the provision of a balloon payment at the end of the term to keep repayments low but the full cost will be recovered during the lease period.

Contract/Hire Purchase

Here the asset in question is owned by the “hiring” company until the final payment is made at the end of the term and then it is transferred into the name of the purchaser. During the hire period, regular payments are made to the hire-purchasing vendor which covers the full cost of the equipment and the interest payouts. At the end of the term, the ownership gets transferred.

The Homework You Must Do Before Applying For a Commercial Property Loan

Commercial property loans are the kind of commercial mortgage which can be obtained rather easily because the loan amount is covered by the property itself and lenders feel less at risk in providing approval. Moreover, this route also helps businesses to own business critical properties without draining their finances.

As against home mortgages where pre-approval can be obtained, approval for commercial mortgages depends on the business plan and on the result of careful evaluation of the property. Therefore borrowers should take care of the following:

1. Finding the right property – The location and other features such as environmental clearance, fire safety standards etc. of the property are crucial in getting the approval. So choose the location where foot and vehicle traffic, zoning regulations, and previous uses of the property are favourable to your type of business. And make sure that the property has all the necessary clearances.

2. Preparing for the application – Lenders need to be convinced that you will be able to clear the loan off in the stipulated time and that the new property will help you earn the expected returns from the business venture. Therefore prepare the financial reports such as balance sheets, tax documents, and sales records meticulously to convince the lenders of your overall financial health.

3. Choosing the right source – Banks used to be the first choice for commercial property loans but current turbulence has made banks extra cautious. So look for the reputable lenders who have been in the business for quite some time and have a body of previous good work. A reputable mortgage broker with connections to a lot of such lenders can work wonders for you.

The right kind of brokers will also help you with the first two points by telling you how to find a good property and how best to prepare the documents.

Mantra for start ups – spend less and spend wisely

Most successful start ups became successful because they do the following things successfully:

• Hire good people
• Offer something the prospective customers always wanted or needed
• Spend economically

While the first two points are self explanatory, it is the third point which needs a deeper discussion. Let’s look at it closely…

For start ups, if the market sentiments are good and there is a ready market for the products/services offered, it is not very difficult to find investors interested in funding it. Remember, in the days of the dot com boom even the flimsiest of ideas got huge venture capital funding.

While getting adequate funding may be just half the job done, the key lies how one goes about spending the money. Here, one has to tread with utmost caution because one of the main reasons behind every failed start up….you guessed it, running out of money sooner than expected!

We can draw plenty of lessons from the dot com bust era when even the brightest of ideas failed because the start up companies blew up all the flush of funds in inconsequential expenses.

Rather than spending the funds in fine tuning the business model, hiring appropriately skilled professionals, improving products/services and marketing them aggressively, the start up ventures ended up spending a bigger chunk of the funds on getting immaculately furnished swanky offices and hiring hi-flying executives with mind boggling salaries, without checking whether they were best suited to the job or not.

In fact, one simple way to set up a presentable office without pouring all your funds into it is asset finance. Asset finance companies offer a variety of competitive leasing or hire purchase products, which come in handy if you are looking to upgrade any of your business assets - be it your vehicles, office equipment, computers or machinery.

Building a customer base

Until or unless the idea is a totally smashing one like the Ipod (mind you Apple was not a start up and commanded a lot of respect at the time of launch), it takes plenty of time and dogged efforts to build a loyal customer base.

In this scenario, the example of Google is fitting. Google went for a slow and steady mode and kept on relentlessly evolving and improving the software and the business model. Slowly it gained the confidence of the people who started shifting loyalties from other search engines towards Google. We all know where Google is today and honestly, many of us don’t even remember the leading search engines of the past.

If we were to follow such outstanding examples, the lessons to be drawn are these:

• Go for a presentable enough office address and décor but don’t blow most of your funds in this area
• Opt for asset finance to get the necessary office furniture and other assets without out laying a big chunk from your funds
• Get good, skilled people, not necessarily the best paid ones
• Fine tune the business model
• Go up the value chain with an improved product line
• Get the pricing right and line up the marketing campaigns accordingly
• Don’t neglect to provide customer service

Commercial Mortgages – the additional expenses

In a commercial mortgage there are certain additional expenses (apart from monthly payments) which need to be paid upfront and can involve some heavy duty payments. Therefore it is necessary to understand them and set aside a budget for them so as to avoid later heartburns.

These additional expenses are:

Valuation fee: A valuation is done to find out the actual value of the property. This is required to reach the mortgage figure. The fee varies with the size of the property.

Environmental surveys: There are certain environmentally sensitive businesses such as gas stations, chemical plants etc. The commercial mortgage for these involves getting stringent environmental inspections done. The fee again varies with the level of sensitiveness of the business or the property to the environment.

Due diligence: Before actually extending a commercial mortgage, lenders run several credit and background checks to find out your credit worthiness. This costs money and the cost is offloaded on the borrower. This fee can vary depending upon the time and work involved.

Broker fees: Generally brokers are involved in commercial mortgage deals. They corner some percentage of the loan value for their services as the fees.

Legal costs: Since there would be a contract involved, a lawyer needs to be hired to review the contract, find out any hidden charges, and to make sure that the inspection work has been carried out properly.

Commercial mortgages – read the fine print carefully

Current reverses in the economy and the resultant tightening on the credit disbursals has had many ‘on the edge’ small businesses scurry for commercial mortgage loans to keep afloat.

As commercial mortgage loans are secured loans, it is relatively easy to get approval for them. But before hurrying into signing on the dotted line, read the fine print concerning following points:

Prepayment charges – Lenders usually charge for prepaying the loan if it is prepaid in the first 3 to 5 years of the mortgage. You should negotiate with the lender for the right amount of charges and should make sure that there are absolutely no penalties (and no hidden charges) for prepaying the loan after this initial period.

Grace period – Make sure that you get a grace period i.e. a period of some days after the due date of monthly instalment during which the lender would not redeem the instalment.

Legal and Professional Fees – Since the legal ownership of the mortgaged asset transfers to the lender, there are a number of charges involved such as title insurance, survey fees and fees for preparing any legal documents. Make sure that you know what the legal procedures involved are and what you will be paying for them beforehand.

If your company’s fundamentals like business outlook, market conditions etc. are strong, there should not be much problem in securing a commercial mortgage loan but it is imperative that you contact a number of lenders to get you the best deal in terms of fees, loan amount, loan tenure, interest rates etc. And the best way to do so is to get in touch with an establishment which is well networked with such lenders.