Commercial mortgages
If you are running a business, there are many reasons why you might want to raise extra capital. You may want to expand the business, investing in new infrastructure or acquiring new premises. You may need to undergo a refurbishment or renew your IT systems to bring them up to date with current standards.
One way to raise the money is to secure a commercial mortgage.
How commercial mortgages operate
As with residential mortgages, commercial mortgages usually take the form of money borrowed against the assets of the company.
Although in most cases the charge will be secured over real estate, some businesses have other significant assets that they can take advantage of.
Vehicles, such as ships and aircraft in particular, can be worth large sums of money and do not depreciate very quickly. Other assets, however, such as computer equipment, are less suited since they will lose their value over a very short time.
Whilst mortgages can be an excellent way to raise capital quickly, you should give careful consideration to the cost to the business. A mortgage transfers the formal title in the asset to the lender and it will only be returned to you once you have repaid the entire debt.
If you do not have consistent cash flow, you may be at risk of defaulting and this could mean the asset being sold.
Lenders’ requirements
Lenders do not want to have to sell mortgaged assets, however, and they will only offer you a mortgage in the first place if they believe the risk to be relatively low.
Most lenders require a positive personal credit and clear evidence that the business is creditworthy. It is customary to apply a loan-to-value ratio and a lender will expect you to invest a proportion of your own money.
The more you are willing to invest, the greater the chance you will have of securing a loan for the remainder.
Sometimes you may wish to mortgage an asset more than once. This is possible, but lenders will investigate what other mortgages are attached to the asset.
The priority of a mortgage is determined by its date of registration. Consequently, it is imperative that a commercial mortgage is registered as soon as possible following completion.
Furthermore, when there is an existing charge, it is common for lenders to request that the other mortgagee enters into a deed of priority/postponement to ensure that their mortgage has priority.
When a lender has concerns about the creditworthiness of a borrower, it is also common to ask for a guarantor.
Legal advice
Entering into a mortgage is a serious commitment, often lasting more than fifteen years. If you are considering doing so, it is important to fully understand the implications for your business.
You should speak to a specialist commercial solicitor at the earliest opportunity in order to ensure that everything runs as smoothly as possible.
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