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Commercial Property Loans: How to finance your business premises

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Commercial Property Loans: How to finance your business premises

Purchasing a business premises is a step that many companies take as they continue to grow but, as you’re probably aware, commercial property can be expensive.

Luckily, there are a host of financing options available including mortgages, loans and more.

In this article, Commercial Property Expert Patsy Whitford breaks down your financing options and their pros and cons, so you can make an informed decision on which to choose.

Can you borrow money for a commercial property?

Yes, there are many ways that you can borrow money to fund a purchase of a commercial property, such as the following:

Please click on the links above to be directed to the corresponding section of this article.

What is a commercial mortgage?

The most common type of commercial property loan is a mortgage.

Commercial mortgages work similarly to residential ones, upon providing a deposit (a down payment on the property) you can get up to a 90% loan for the purchase of the property, which will need to be repaid.

Commercial mortgages often attract a higher rate of interest than residential ones. 

Although commercial mortgages are so common, it may not suit your needs. A mortgage is a long-term commitment and involves making regular payments every month. Many people opt for more short-term loan options.

You will also often be asked to provide personal guarantees from individual directors and a debenture from the company. 

This article predominantly focuses on the other types of loans for purchasing commercial property. You can read our dedicated article on commercial mortgages here.

What is a bridging loan and how does it work?

A bridging loan is a short-term loan that, hence the name, helps you bridge the gap between the sale of one asset and the purchase of another or a temporary shortfall in available funds.

For example, you could take out a loan of this type to help raise funds for a new commercial property while you wait for the old premises to sell.

Bridging loans can be open, meaning there won’t be a set date for you to repay it, or closed which means there will be.

Related: Getting your commercial property ready for sale - a checklist

How much can you borrow on a bridging loan UK?

This differs from lender to lender and will depend on your particular circumstances. 

Bridging loans are secured so you’ll have to secure these against an asset, a property for example. If you don’t have any loans already secured against the property a lender may be more generous in what they will lend you.

What are the pros and cons of bridging loans?

The biggest advantage of using a bridging loan is the speed and ease of putting together an arrangement. Because they’re short term, you can get a loan of this type in a much shorter time frame than a normal commercial mortgage and the application process is normally simplified. 

Furthermore, bridging loans are usually available on every type of property. Lenders won’t be as picky as they are with mortgages.

However, one disadvantage of bridging loans is the fact they’re secured and, if you’re unable to repay the loan, your property and/or assets may be at risk.

In addition, the interest rates for bridging loans are usually higher than other similar loans and due to the fact they are short term loans, they can have financial penalties if not repaid on time. 

Is a bridging loan cheaper than a mortgage?

Assuming the amount your borrowing is the same, interest rates are normally higher for bridging loans than they are for mortgages.

Nevertheless, a bridging loan may be more suited to your needs if you wish to get a quick, short term loan.

Related: How does Stamp Duty work on Commercial Property? Advice from Specialists

What is commercial asset-based lending?

Asset finance, or asset-based loans, are loans secured on assets owned by the business. This type of loan can also be used to finance the purchase of a commercial property.

Assets used as collateral could include work-in process, raw materials, property, land, equipment, office furniture and more. Similarly to bridging loans, if a loaned sum is not repaid then the asset(s) will be at risk.

Lenders will generally favour businesses with assets that are easy to identify and calculate the market value of.

Which loan is best for commercial property?

Which loan is best for you depends on your and your business’ circumstances!

If after reading this article you would like to discuss your options, have any questions or would like to instruct a solicitor to assist please don’t hesitate to contact our specialist Commercial Property Team.

We would be happy to discuss your options with you and help you through the purchase and or sale process.

You can get in touch for a free initial chat on 01202 499255 or by filling out the form at the top of this page.

Leasing a property?

Alternatively, you may wish to lease the premises, for one reason or another. If this is the case, you’ll need some separate advice on securing a lease.

Here’s all of the articles we have on commercial leases. Hopefully at least a couple will be useful to you!

The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.