An introduction to commercial mortgages for restaurants

Whether it’s a traditional fish and chip shop in a local village or a high-class Michelin-starred establishment, restaurants are increasingly becoming an important part of the UK’s social scene. Eating out now accounts for a third of the UK’s expenditure on food and drink, and the sector is becoming an attractive proposition for many entrepreneurs.

However, those wanting to enter the restaurant market, whether investing in an established restaurant or starting a new venture, will need to be aware of the intricacies involved in applying for a commercial mortgage. This guide provides an introduction to commercial mortgages and explains what lenders will require to consider an application.

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 the restaurant industry differs from other sectors

Restaurants in the UK can be broken down into different sectors, each with its own strengths and weaknesses when it comes to applying for a commercial mortgage. Fast food establishments, for example, vary significantly in the eyes of a commercial mortgage lender. Chain restaurants and franchises tend to offer a lower risk for lenders compared to those planning to operate independently as the business model has previously been tested and information on its success is widely available.

Mainstream restaurants and fine dining establishments can also present similar risks to commercial lenders. However the preparation and presentation of a strong business plan, along details of what sets your restaurant apart from others in the vicinity, can mean the difference between your application for finance being accepted or rejected. 

Whether you approach a high street bank or specialist lender, they will want to know:

• The trading history of the existing restaurant or projections for a new venture
• What experience you have in the restaurant industry
• The amount of deposit you have available
• The location of the restaurant
• Whether you have an adverse credit history

In addition, it will be necessary to demonstrate to potential lenders that you have an understanding of the current environmental health and food safety requirements. These regulations are both complex and far reaching, and it will be necessary to set out thorough proposals showing how you plan to meet any shortfalls.

However, when applying for a commercial mortgage, 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.

With increasing numbers of consumers choosing to eat out, the restaurant industry can be lucrative. However, to ensure you can make the most of the opportunities in the sector, it will be necessary to ensure you have the plans in place to attract investment from your chosen commercial mortgage lender. 

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.