A guide to personal guarantees for business borrowing

Buying a property for your business is a significant commitment, and you might not have the money to fund it yourself. That’s where commercial property finance comes in.

Purchasing a commercial property could help to expand your business.

It could also be a good investment that will generate a profit in the future.

Buying a property is a big step, though, requiring funding you might not have.

Using commercial property finance solutions, you may be able to access the money you need.

As always, when working out what financial product is right for you and your business, it’s a good idea to seek independent, specialist financial advice.

Understanding commercial property finance

The main types of financing available for commercial property purchases are:

Mortgages

Similar to a residential mortgage, a commercial mortgage is a loan that involves paying a deposit followed by monthly repayments with variable or fixed interest rates.

Commercial mortgages usually run for between one and 30 years.

Interest rates tend to be higher than for residential mortgages due to the higher risk for the lender.

The types of commercial mortgages are:

Owner-occupied mortgages

This is for businesses buying a property for commercial purposes.

Commercial buy-to-let mortgages

This type of mortgage is for when you intend to rent the property to another business.

Lenders will look at your business’ trading history to decide whether to approve your business for a commercial mortgage.

You will usually need to provide accounts for at least the past three years and projected trading figures for the future.

Bridging loans

A commercial bridging loan is short-term finance which can be used to purchase a property until long-term finance, such as a mortgage, can be secured.

Bridging loans typically cover no more than 18 months, and the interest rates are usually higher than for commercial mortgages.

Bridging loans are generally fast to access (sometimes as quickly as 48 hours), but you’ll need to show how you can repay the funding.

Secured loans

You could use a secured loan to purchase a property outright or use it as a deposit for a commercial mortgage.

You’ll need to use an asset from your balance sheet as security.

The lender may also consider third-party security, such as a guarantee, instead of or alongside other security.

The cost of buying commercial property

Buying commercial property involves additional costs, including:

Stamp duty

You may have to pay a tax known as stamp duty land tax in England and Northern Ireland, land transaction tax in Wales and land and building transaction tax in Scotland.

The rates you pay are dependent on where the property is and its purchase value:

England and Northern Ireland

• Up to £150,000: 0%
• The portion from £150,001 to £250,000: 2%
• The remaining portion above £250,000: 5%

Wales

• The portion up to and including £225,000: 0%
• The portion over £225,000 up to and including £250,000: 1%
• The portion over £250,000 up to and including £1,000,000: 5%
• The portion over £1,000,000: 6%

Scotland

• Up to £150,000: 0%
• £150,001 to £250,000: 1%
• Above £250,000: 5%

Business rates

Business rates (known as non-domestic rates) apply to most non-domestic properties.

The amount you pay is dependent on the rateable value of the property.

Use these links to calculate business rates:

• England
• Wales
• Scotland
• Northern Ireland

Several reliefs available could reduce your rates or mean that you pay no rates at all.

Use these links for more information about business rates relief:

• England
• Wales
• Scotland
• Northern Ireland

Benefits of owning commercial property

Potential advantages of owning commercial property include:

• You have the freedom to make changes to the property whenever you want, unlike renting a property when you need the landlord’s permission
• If the property increases in value, you could make a profit if you decide to sell
• Renting your property to another business could provide a new income stream
• Purchasing a property means you can more accurately predict your business costs
• You may get some tax benefits, such as reducing the Capital Gains Tax you must pay if you sell the property.

Potential risks and drawbacks of owning commercial property

Potential disadvantages of owning commercial property include:

• Purchasing a property ties up a lot of capital which you could instead use to make other investments for your business
• You are responsible for any repairs or alterations to the property which add extra business costs
• Owning a commercial property means you are also responsible for complying with health and safety regulations such as fire safety legislation
• You must pay other property costs such as business rates, stamp duty, building insurance, and energy charges
• Fluctuations in the property market could mean your investment declines in value
• The property may become inappropriate if your business grows or declines.

How to choose the right financing options

Assess your finances to determine which property funding is best for you.

Consider the interest charges and fees to ensure you can pay them.

Search online for lenders, visit review websites, speak to other business owners for recommendations and consult an independent business adviser or accountant.

Draw up a shortlist of finance facilities and compare loan terms and interest rates.