Small Business Mortgage

Is a small business mortgage appropriate for your company, and if so how do you find the right one when there is a Credit Crunch...

When you take out a business mortgage you are effectively taking out a special type of commercial loan, whereby the lender will gain legal rights over the property in question until you are able to fully repay the loan. For this reason you need to carefully consider the effects taking out a small business mortgage will have on the finances of your company.

Small business mortgages usually last a maximum of 20 years. In order to make a successful application you need to be able to demonstrate sufficient probability of repayment. Any business and financial plans will help and be prepared for an inspection of the property in order to ascertain market value. In order to make a down payment for a small business mortgage you will generally be asked to provide 20-30 per cent of the purchase price. However some small businesses may only be required to provide much less (although interest rates will reflect this).

Advantages and Disadvantages
The advantages of purchasing a property as opposed to letting include subletting potential (generating extra revenue), mortgage repayments that are cheaper than your current rent and a repayment schedule which has fixed monthly overheads.  However there are also disadvantages such as the increase in management responsibilities for the property. A mortgage will also need to be subsidised by money from your business in order for it to become your property – this can be quite draining on the finances of your small business so work out the sums carefully before committing to anything. A further more obvious down-side of taking out a small business mortgage is that it immediately becomes much harder to relocate the central activities of your company than it would have been were you renting.

Try to agree a period of grace – a few days for each repayment date to give you a bit of leeway and reduce your stress levels should anything go wrong.

Once you have decided to take out a small business mortgage there are two key factors that need to be carefully considered within each offer.

Firstly -The type of interest rate:- which will either be variable or fixed. The former will fluctuate according to current market rates and although it generally means you pay a lower rate of interest overall; there is a higher risk element involved. Fixed rate mortgages however, mean that you will agree on a rate of interest which will remain constant throughout the period of your mortgage. This means you will not benefit from market reductions but on the flipside you will not be charged an increased amount when market prices increase.

Secondly – The repayment schedule:- remember the longer your repayment schedule, the higher the interest you will pay in the end. There are four main options for the repayment of your small business mortgage.

1) Equal payments – The most common method, whereby you pay the same amount regularly. Part of every payment reduces the actual mortgage loan, while the rest returns the interest.
2) Equal payments and a final bulk payment – As above with the regular equal payments, but for a shorter period of time with a larger instalment at the end to cover the outstanding balance. This is useful if you need to pay less in the early stages but are confident of having more funds available towards the end.
3) Interest-only payments and a final bulk payment - This is a more extreme version of number two whereby you only pay back the interest at regular intervals, before returning the remaining interest and the whole of the principal sum in one final payment at the end.
4) Endowment small business mortgage – this provides additional security which should result in a lower interest rate, as the repayment of the principle sum is paid back through some form of endowment, such as a personal equity plan or life assurance policy. While only the interest is paid back through the normal channels.

When you take out a small business mortgage the best thing you can do for your company is to be utterly stringent about the finer details of the deal. Look out, and budget if necessary for things like processing fees charged by the lender and legal fees which all can turn out to be rather costly.