Loans to buy your business premises

The trigger is usually one of a handful of moments:

• Your landlord offers to sell. Landlords often approach sitting tenants when a lease renewal is near or when they want to exit a portfolio.
• A lease renewal or rent review lands badly. A large increase, or a landlord unwilling to grant the term you need, makes ownership look cheaper over the long run.
• You have outgrown the space. A practice merging with another firm or a manufacturer adding a production line needs a bigger building and would rather invest in one it controls.
• You need to alter the building. Clean rooms, surgeries, workshops or heavy plant are costly to install in someone else's property and may have to be stripped out at the end of a lease.
• Succession planning. Partners or directors want the building held separately so it can provide income in retirement after the business is sold.

Buying suits a business that is settled in its location and size for the next decade. If headcount could double, or the firm might relocate for a client or a merger, a lease may still be the better tool.

In our case study on a £650,000 industrial unit purchase, property finance was kept separate from the cash set aside for machinery and staff.

You are most likely to qualify if your business has two or more years of profitable accounts, will occupy most of the building itself, can show the repayments are affordable once rent is removed, and has a deposit available. With owner-occupied premises, the lender is really underwriting your business with the building as security. Expect these points to be tested:

• Rent replaced by repayments: the lender swaps your current rent for the proposed loan repayments in its model of your profits, then checks what is left after every other debt payment.
• Existing borrowing: a practice with stable fee income and modest debt usually passes comfortably; a business carrying asset finance, a tax loan and an overdrawn director's loan account will find the numbers tighter.
• Trading record: a short history usually means a lower percentage of value is offered than for an established business.
• Alternative use value: lenders ask what the building would sell for with the business gone, so a property fitted out for one narrow use, such as a surgery or a laboratory, may be valued on what a general office or light industrial occupier would pay.
• Building type: a conventional office or industrial unit attracts more lenders, and usually a higher percentage of value, than a specialist building.

Our detailed page on commercial mortgages explains repayment options, covenants and lender types.

The deposit is where most premises purchases succeed or stall. Common sources include:

• Retained profits in the company. The simplest, provided enough working capital is left behind.
• Equity in other property. A second charge over another commercial building you own can raise the deposit through a secured business loan, though the purchase lender will take this extra borrowing into account.
• Directors' or partners' own funds, introduced as capital or a loan to the business.
• A pension scheme. A SSAS or SIPP can buy commercial property, alone or alongside the business, and lease it to the company. Pension schemes can borrow only within limits linked to the scheme's value, and HMRC sets out how pension trustees' investments are taxed. Our guide to buying premises through an SPV or pension compares the structures.

Illustration (hypothetical round figures): a firm paying £40,000 a year in rent is offered its building for £600,000. If a lender funds 70%, the loan is £420,000 and the firm needs £180,000 towards the price, plus Stamp Duty Land Tax at the non-residential rates, both sides' legal fees and the valuation. If VAT has been charged on the building by an owner who opted to tax, that cash is needed at completion too, even if it is later recovered; a property VAT bridging loan can fund it until HMRC repays it. The firm should check it can find that money and still keep several months of costs in reserve.

Sitting-tenant purchases have particular features. Your existing lease normally ends when you buy the freehold, which also removes any looming dilapidations claim, a real saving on an older lease. You already know the building's condition, running costs and neighbours, which lenders see as a strength. On the other hand, the landlord knows you want to stay, so get an independent valuation view before agreeing a price, and do not serve notice or let a lease lapse until the funding offer is in hand.

Ask your solicitor and accountant to deal with capital allowances on fixtures before exchange. When buying a used building, the buyer's ability to claim allowances on items such as heating, lighting and lifts generally depends on what the seller has claimed and on what is agreed in the purchase contract, and it cannot easily be fixed afterwards.

Some buildings cannot be mortgaged straight away: they may be vacant and in poor repair, lack essential services or be sold at auction with a fixed completion date. In those cases a bridging loan can fund the purchase, with a commercial mortgage arranged once the building is usable. Interior works to a building you already occupy, such as partitioning, IT cabling and treatment rooms, are often better funded separately through fit-out and refurbishment finance, so the mortgage is not stretched to cover assets that do not add value to the property.

Buying business premises with a commercial mortgage typically takes eight to twelve weeks from application to completion, and complex purchases can take longer. An agreement in principle can often be obtained within a week or two of providing accounts. Most of the remaining time goes on the lender's valuation, which for a specialist building such as a surgery or workshop may take longer to arrange, and on the legal work: title checks, searches, leases of any parts you will not occupy, and environmental reports on industrial sites. Sitting-tenant purchases can be quicker because the building and occupier are known. Auction purchases with a fixed completion date often need a bridging loan first, as a mortgage rarely completes in time.

The building you are buying is the main security: the lender takes a first legal charge over the property, registered at HM Land Registry, and can sell it if the loan is not repaid. Lenders lending to a limited company often also take a debenture over the company's assets, and many ask directors or partners for personal guarantees, particularly where the trading record is short or the building is specialist. If the deposit is raised against another property, that property carries a charge too. Where a pension scheme or a separate property company owns the building, the charge sits with that owner and the lender usually wants a formal lease to the trading business. Our guide to personal guarantees explains what directors are signing.

If the business struggles, the building that houses it is at risk, and personal guarantees may extend that risk to your own assets. Ownership concentrates your wealth in one local property market. Selling a business that owns its premises is also more complex: some buyers want the building, others would rather rent it, so think about whether the property should sit inside the trading company at all. Finally, a rent-to-repayment comparison that works at today's rates may not if a variable rate rises, so test the repayments at a higher rate before committing.

If a straight owner-occupier mortgage does not fit, there are several other ways to secure the building or the space you need.

• Owning it outside the business, with directors or a property company buying through an investment mortgage and leasing it to the trading company.
• A pension purchase through a SSAS or SIPP, covered in the deposit section above.
• A bridging loan first for auction or run-down property, refinanced later; see commercial property refinance.
• Negotiating a longer lease and funding the fit-out instead, which keeps capital in the business.