Watching your business grow and thrive is an exciting time for any business owner. However, the growth of your business comes with the need of expansion. Before you know it, you will find yourself in need for a larger warehouse or factory to hold all your products and supplies.
If you are currently renting premises for your business due to the amazing rates and loan values commercial lenders and currently offering, then you could find that purchasing your own premises could actually save you a lot of money and can be cheaper than continuously renting.
Commercial funding can aid you in the purchase of the warehouse or factory you would like to acquire.
What is warehouse lending?
Warehouse lending is essentially a line of credit given to the loan originator. It is a way for a bank to provide loans without using its own capital. Financial institutions often provide warehouse lines of credit to mortgage lenders, the lenders must repay the financial institution. The bank itself handles the application and approval of the loan process. They also pass the funds to the warehouse lender to a creditor in the secondary market.
It is important to note that warehouse lenders are not mortgage lenders.
How to get Warehouse and Factory Mortgages
The type of mortgage you will need to obtain for a factory or a warehouse is a commercial mortgage. This is a type of loan used for the acquisition or refinance of a commercial property which warehouses and factories fall under.
The criteria is usually quite flexible with commercial mortgage lenders as they tend to take an individual view to assessing applications. Most applications will assess you individually based on your credit history, income and the deposit you have available.
What are large commercial mortgages?
Generally, the process of your application will be quite thorough, but as the size of the loan increases, the more thorough lenders will be through your application process which means that your application could be very timely. Additionally, negotiations around interests rates may be difficult to manage.
It is important that while arranging a commercial mortgage in excess of £1,000,000, you should have an experienced broker to help you with your application. Without an experienced broker in this area, you lose the necessary experience and contacts needed to be successful with your application.
Can I get an interest-only mortgage?
Yes, interest-only options are available for commercial mortgages on warehouses or factories. However, the number of lenders offering interest-only options is very limited. By choosing an interest-only mortgage, this means that you will be excluding any repayment mortgages from consideration therefore, you may have to pay a higher rate.
Depending on your lender, interest- only commercial mortgages tend to be restricted to a maximum of 75% to value. The interest rate itself that you will have to pay will be lower however, overall interest payments over the agreed term often works out higher than on capital and interest.
Should I rent or buy a warehouse space?
The decision to buy or rent can often be a very difficult one. Both options come with various pros and cons. Renting may be a versatile option however, buying is often the more affordable option in the long term.
The business of renting commercial spaces is very popular which means the market is large. The deposit needed to rent a warehouse space will be a lot smaller than if you were to take out a mortgage and buy the space. However, with renting there is always the risk of increased rent which can hurt your cash flow if you are not prepared for it.
As buying the space is a more serious commitment to renting, the deposit will be significantly larger. However, after buying the space you will have the freedom and ability to modify it as you wish. If you do have any extra space for residential purposes you can also factor this into your loan to gain extra income from renting your space.
Usually commercial estates such as warehouses often gain value over time, which means when you own it you can also profit from the increase of its value.
Buying a factory or warehouse can seem very daunting but it is much like buying a home. You will need a similar type of mortgage in order to afford buying the property.
Investing in any type of property is a big step for any business.
You need to effectively plan how much your business is likely to grow. Buying a warehouse can be a very worthwhile investment, however the investment can be considered mute if your business outgrows the space. If this happens you will find yourself having to move again and find another property in a few short months after your investment.
Funding the new property
The most common way to fund a warehouse or factory is through a commercial mortgage. These mortgages share many similarities with residential mortgages but also have key differences.
If you are not able to keep up with monthly repayments of a residential mortgage, the property may be at risk. This is the same with a commercial mortgage. This is why it is essential that you ensure all your finances are secure enough to comfortably keep up with the repayments without putting the investment in jeopardy.
You will often be required to invest a certain amount of your own private funds as a down payment into the property in order to secure the mortgage of your warehouse or factory.
It is important to note that all lenders are different. There are some lenders that are able to offer you different interest rates as well as lenders who are able to be more flexible with your mortgage. This is why it is important to find the right lender for you so you can find a commercial mortgage for your property that is tailored to you.
What criteria do I need to meet for a warehouse/ factory mortgage?
The terms for a commercial mortgage vary depending on individuals and businesses. In order to apply for a factory and warehouse commercial mortgage application the financial information needed to the support the mortgage is:
– The last 2 years audited accounts
– Clean credit history
– Latest management figures
– Profit and loss forecast (cash flow projections) for the next 12 months
– Last 6 months of bank statements
– Brief personal CV, profiles of partners & directors
– Asset/ liability statement of applicants
The criteria will vary depending on who you are and what type of business you own but these are what the typical criteria includes.
How does the mortgage work?
A commercial property mortgage is usually a long term loan which can range up to 25 years. As most commercial mortgages only offer up to 70% of the total value of the property, the lender relies on the business to find the rest of the funding to complete the purchase.
The commercial mortgage rates are individually priced to match the strength of the proposal.
The loan term can vary anywhere from 5-40 years. Buying a commercial estate is a big financial commitment. This is why it is important to understand what you want from your commercial mortgage and what your lender needs in return from you.
Repayments are often monthly or quarterly. Interest rates are typically higher with commercial mortgages than residential ones as the lending is seen as a higher risk.
Your credit history with some loans can be overlooked depending on the projected profits of your business. However, this is not the case with commercial loans. Your credit history will play a big part in whether your commercial mortgage application gets accepted. It is a very big part but your company’s business plan and projections can also help provide a comprehensive picture to your lender as to whether you will be a viable applicant.
As with a residential mortgage, you will be expected to pay a conveyancing (legal) fee, arrangement fee and a valuation free as well as an administration charge.
Variable rates are set against the Bank of England base rates and will vary. Interest rates fluctuate depending on the set rate at the time on your loan. There are some cases where fixed rates can be set for a certain period of time (often up to five years).
The interest repayments on your commercial mortgage are tax deductible.
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