Commercial property finance for UK businesses and investors

The single question that shapes a commercial property application is who pays the loan back, and from what.

With an owner-occupied property, the business in the building repays the loan out of its trading profit. The lender reads your accounts much as it would for any business loan: turnover trend, profit after the owners have been paid, existing debts and how comfortably the new repayments sit inside the cash the business generates. The property is the fallback, but the business is the primary source of repayment. A strong trading record can therefore support a purchase in a quiet location that an investor would struggle to fund.

With an investment property, the rent repays the loan. The lender cares about the tenant's financial strength, how long the lease has left to run, whether the tenant can walk away at a break clause, and what the building would let for if it were empty. A modern warehouse let to an established occupier on a long lease is a very different credit from a parade of small shops on short, flexible terms, even if the valuations are similar.

Some buildings sit between the two. Hotels, pubs, care homes, children's nurseries and petrol stations are trading property: their value depends on the business carried on inside them, so lenders value them on trading performance and want operators with a track record in that sector. Self-storage centres are a similar hybrid, covered on our self-storage finance page.

Commercial property finance is available to limited companies, LLPs, partnerships, sole traders, property SPVs and directors' pension schemes, provided they can fund a deposit and show how the loan will be repaid. An owner-occupier needs a trading record that covers the repayments; an investor needs a tenant and lease that support the rent, and lenders give more choice to buyers who already own and manage commercial property. A business with less than two years of accounts, a first-time investor or a buyer of specialist trading property will find a narrower field of lenders, and may be asked for a larger deposit. Our guide to buying business premises covers deposit planning in more detail.

Many commercial purchases are funded in two stages. A building that is vacant, in poor repair, lacks a valid energy certificate or is being bought on a 28-day auction timetable often cannot be funded by a term lender at the outset. A bridge funds the purchase and works; once the building is occupied, let or improved, it is refinanced onto a commercial mortgage based on its new value.

Illustration (hypothetical round figures, not a quote): a manufacturer buys a vacant industrial unit at auction for £400,000. The roof needs replacing before any term lender will consider it. A bridging lender funds part of the price and the works, secured on the unit. Six months later, with the roof done and the manufacturer trading from the unit, a commercial mortgage lender values it at £550,000 and lends against that value and the business's profits, clearing the bridge. The business pays bridging costs for a short period, but ends with long-term debt on an improved asset.

The risk in this approach is the second step. Before taking the bridge, you need a realistic view of whether a term lender will refinance it, on what value and against which accounts. We look at both stages together for exactly this reason.

The deposit is rarely the only cash a commercial purchase needs. Build these into the plan before an offer is made:

• Stamp Duty Land Tax, charged in England and Northern Ireland at the non-residential rates (Scotland and Wales have their own land transaction taxes).
• VAT on the purchase price where the seller has opted to tax the building, unless the sale qualifies as a transfer of a going concern.
• The lender's valuation fee and legal costs, which the borrower normally pays, alongside your own solicitor.
• Arrangement fees, and on some products exit fees or early repayment charges.
• Survey, environmental and building reports, insurance, and any works needed before you can occupy or let.

Who owns the building affects the tax position, the lender's approach and what happens when the business is sold or a director retires. The main options are the trading company itself, a separate property company (often called an SPV) owned by the same shareholders, the partners of an LLP, or a directors' pension scheme such as a SSAS or SIPP that leases the building back to the business. Lenders are comfortable with each of these when the structure is explained clearly. Our guide to buying premises through an SPV or pension sets out how each one works; take tax advice from your accountant before choosing.

A commercial mortgage typically takes six to twelve weeks from application to completion, and longer where the property, the lease or the ownership structure is complex. A bridging loan on a clean title can often complete within a few weeks, which is why it is used for auctions. The steps that set the pace are rarely the credit decision: booking and receiving the lender's valuation, title and lease review by solicitors on both sides, environmental or building reports, and, for SPV or pension purchases, extra legal work on the structure. Sending leases, accounts and deposit evidence at the start, and instructing a solicitor experienced in commercial lending, removes most avoidable delay.

Commercial property debt is usually secured with a legal charge, and lenders often add personal guarantees from directors. If repayments stop, the lender can sell the property, and a guarantee can make up any shortfall from your own assets. Commercial mortgages frequently carry covenants, such as a maximum loan-to-value or a minimum level of income cover, tested during the loan; breaching one can trigger renegotiation even when every payment has been made.

Where a deposit is short, some lenders will take a charge over another property as additional security, and any loan behind an existing mortgage ranks as a second charge that normally needs the first lender's consent. Our guide to personal guarantees explains what a guarantee commits you to.

Owning premises also ties up capital that could fund stock, staff or equipment, and it makes relocation slower. Leasing remains a sensible choice for a business that expects to outgrow its space. For some owners, government-backed options such as the Growth Guarantee Scheme, which is offered through participating lenders, may be relevant where security is limited.

The main alternative to borrowing against a building is not to own it: keep leasing and spend the capital on the business, funding the works to a rented unit with fit-out and refurbishment finance. Where the money is needed for the business rather than the property, a facility secured on other assets can avoid a charge over premises, such as asset refinancing against equipment you own or asset-based lending against debtors and stock. Smaller needs may suit an unsecured business loan, usually with a director's guarantee.