An introduction to commercial mortgages for retail

Owning and operating a retail business holds great appeal for many entrepreneurs. However, whether it’s the corner store across the road, a prime high street position or a larger site in an out-of-town retail park it may be necessary to apply for a commercial mortgage to secure the perfect outlet for your business.

Retail is one of the largest and fastest growing industry sectors, with almost 280,000 retail enterprises across the UK. With current research showing that consumers spend around £250 billion through the retail sector each year, it is all the more important to invest in appropriate premises.

What is a commercial mortgage?

A commercial mortgage can be used by both start up or existing businesses to finance the purchase of buildings or land and to make improvements or modifications. It can be arranged through a high street bank or through a commercial lender and can provide up to 85% of the purchase price; however this will vary depending both on the value of the property and on the maximum loan-to-value ratio of the individual lender.

The lender will normally require a deposit of 20-30%, and will want proof that the repayments can be met. Existing businesses will need to provide a full set of trading accounts covering the last two years, while start ups will need to provide a full business plan showing the expected income projections.

How raising a commercial mortgage for retail industry differs from other sectors

The retail sector as a whole is sensitive to both economic fluctuations and global events, such as the July 7 bombings which had a marked impact on retail spending in the capital in the months following the attacks. However, retailers recover quickly from these set backs and are seen as a relatively stable investment by many commercial mortgage lenders.

Each lender you approach will want to know:

• The location of the business premises
• Whether you have any industry experience
• The amount of deposit you have available
• Whether you have an adverse credit history

If you are looking to purchase an existing business, its retail success and the state of its books will be of immense interest to lenders. It may be necessary to explain how you will continue to ensure the business is a success or, if the business is in decline, how you intend to make the business profitable. A comprehensive business plan with thorough financial plans will be essential.

The percentage of residential space attached to the shop premises is another important consideration that many lenders will want to take into account. This is particularly true for high street shops that often have residential space above which can be rented out to provide another form of income. If 40% or more of the property comprises residential space and the owner of the premises plans to occupy that space, the mortgage will need to adhere to current FSA residential mortgage regulations.

If you initially struggle to achieve the interest rate you had targeted it is worthwhile keeping in mind that you will have the opportunity to re-mortgage with another lender to achieve your optimum rates and terms at a later date.

Starting and operating a retail business can be both challenging and time consuming but, with appropriate advice and guidance, you could be welcoming customers to your own premises in no time.

Contact us to find out more about how The Diverse Finance Company can help you raise a commercial mortgage or take advantage of other business finance solutions.

Copyright © 2006 The Diverse Finance Company

copyright © 2005 Diverse Finance Ltd. All Rights Reserved.