Buying your business premises is a big step but it’s also one that could be consideration sooner than you think.
Lenders are generally willing to support owner occupier property purchases where the business can demonstrate consistent performance and good affordability. Let’s break down what this criteria looks like and how to get there.
How to demonstrate affordability? The clearest indicator is rent. If your business has been paying rent for a number of years at an amount higher than the new mortgage payment would be, it’s a strong indicator that the business can afford a mortgage.
To evidence this you would normally need to show your last 12 months payments to prove they have gone out on time and in full. The full amount of rent should also be showing as a line item on your P&L or Income Statement so it’s easy for the lender to see those funds leaving your business.
Alongside rental payments there must also be no signs of stress on the business. This means good profits (after the rent has been paid), well run bank accounts, low levels of debt and a positive balance sheet.
Below we will talk about how to get there if your business needs some help.
Debt Service Coverage
In addition to reviewing the rent your business has been paying the lender will also want to build in an additional margin to allow for fluctuations in affordability.
Typically this will be between 125% and 145% of the proposed mortgage payment calculated at either the rate you will pay or a higher rate determined by the lender.
In the case of owner occupier, your EBITDA figure will be used to understand if you have sufficient coverage. Some lenders will be happy to work off the most recent figures, others will want an average of the last two or three.
Performance can be difficult to fully assess but there are key indicators a lender will look for in addition to affordability. The main ones can be token down into debt, profitability and management.
Business debt levels
If your business is looking to buy a premises the lender will want to be sure that it is trading comfortably without having to take on lots of short term debt. Before making any applications you should review the debt you have and look to clear it or consolidate.
More importantly, understand why the business had to take those debts in the first place. If it was to fulfil a new order – which then resulted in increase profits – then great, this is growth finance and a positive. If the lending was to pay mounting bills because the cash wouldn’t stretch any further this means you need to review your business strategy before looking to take on any other commitments.
Good financial management
Another common sign of stress is poorly run bank accounts. Make sure your bank accounts are cleanly run with no missed / late payments prior to making an application.
Look at your payments overall – are employees and HMRC paid on time? Are all your HMRC liabilities up to date? What about other payments such as VAT or CIS contributions? Lenders look to make sure essential debts are paid in a timely manner.
Is your business profitable?
Lenders will want to see at least one year – preferably 3 or more – good profits in the business. Think about your Directors drawings here also, if you take a nominal salary and rely on dividends – calculated net after profit – the lender will likely taken this into account and deduct it from your available cash flow.
How much will it cost?
Monthly mortgage payments should never exceed the cost of rent so, if you can afford rent, it’s likely you can afford a mortgage.
There are significant upfront costs to consider including legal fees, valuation fees and arrangement fees. There may also be stamp duty to pay and specialist reports to get completed. The greatest capital expensditure will be raising the deposit to purchase the property and potentially any works that need to be done to prepare the space for your business to operate.
Commercial mortgages are available up to 85% loan to value for some types of property but lending to 75% is more common. This means the business will have to raise 15% – 25% of the purchase price.
Who can help me buy my business premises?
At Charles Edwardson we can put you in touch with one of our property experts who will be able to recommend the right commercial mortgage for you and propose your application to the most appropriate bank or lender for your circumstances.
If you feel your company is not quite ready but buying your business premises is a goal for the future you may want to explore our business coaching. We can help get your business finance ready, provide an actionable growth plan and streamline your processes so you can get there as quickly as possible.
Book a consultation with one of our experts today.