A Guide to Commercial Mortgages

The world of commercial loans for dental practices is now more varied than ever. Commercial property finance has many different variants, sometimes making it quite difficult to understand.

There are different platforms that each suit different projects. The usual issue is finding out which one best suits your dental business needs.

Here is our guide to understanding all there is to know about commercial property finance.  

What is commercial property finance?

Commercial property finance is the money that an individual or company obtains in order to fund the purchase or the development of a property. It is very rare for a company or an individual to always have the cash means ready to purchase a commercial property. Therefore, needing to raise money is common, especially in these cases, from a bank or other lender.

Commercial property finance can additionally be used for business expansion (adding more practices) or improvements to a property or even to help with relocating the business. 

A commercial property is one that is primarily used for non-residential purposes. For example, dental practices, surgeries, offices, factories, retail stores and restaurants. Properties that can be used either fully or semi commercial.

A fully commercial building is a building that is wholly used for commercial purposes. A semi commercial building is one that is used for both commercial and residential purposes. For example, a dental practice with flats above it.

There are different types of commercial property finance. Commercial finance was formerly known to come from mainstream lenders, usually banks, but now, there are many alternative modes of finance available too. 

Each type of building in the commercial property market is made up of five main categories. 

These five categories include: 

• Offices
• Retail (Stores, shopping centres, shops)
• Industrial (Warehouses, factories)
• Leisure (Hotels, pools, cafes, sports facilities, restaurants)
• Healthcare (Medical centres, dentists, hospital, nursing homes)

A commercial mortgage is any loan secured on a property that is not your residence or intended for residential purposes. 

Why will I need a commercial mortgage for my dental practice?

Commercial finance ensures that your dental business, regardless of size, are able to thrive and hit their targets, rather than miss out purely because they aren’t able to generate enough revenue to expand. 

A dentist might seek commercial finance when a point of growth is impending. Sometimes the obstacle in the way of expanding your dental practice is funding, that is where commercial loans come in handy. 

There are a number of reasons as to why a company or sole trader may wish to raise commercial property finance. A few key reasons that may need to take out a commercial property loan are if you experience growth in your company, through staff or inventory, or you have purchased new equipment or you may need to extend your commercial property.

You may even need a loan in order to purchase a completely new property. Commercial finance allows a way to essentially provide working capital for dental practices.

Better access to commercial finance has paved the way for small dental practices to generate capital through these loans. If your surgery or office has become run down or needs a renovation, you may also need to raise commercial property finance to fund this. There may be cases where you need to build extensions to an existing property or grow your property portfolio.

When these purchases or improvements cannot be funded by existing assets, you may need to consider raising commercial property finance. 

Commercial loans can be used for more than just buying your business a new home, it can also be used to: 

• Develop new property 
• Develop existing property 
• Extend current premises
• Buy land
• Commercial developments and projects 

When will I need a commercial mortgage?

There are a number of reasons why a dentist or dental practice owner may wish to raise commercial property finance. If you experience growth in your company, perhaps your staff or inventory has grown or you have purchased new equipment, you may need to extend your commercial property. You may even need to purchase a completely new property. 

If your surgery or office has become run down or needs a renovation, you may also need to raise commercial property finance to fund this. There may be cases where you need to build extensions to an existing property or grow your property portfolio, 

When these purchases or improvements cannot be funded by existing assets, you may need to consider raising commercial property finance. 

How much can I borrow for a commercial property?

Commercial property loans are used to help raise funds for many purposes, such as buying estate for your business. The minimum amount for a commercial property finance deal is usually £150,000 and has no maximum figure. Provided you have all the requirements your lender needs when you are applying for the loans you should have no issue sourcing the funds you need to make your purchase. 

When are commercial mortgages used?

Commercial mortgages generally take over very large amounts that business loans do not allow for. For these kinds of large amounts needed for commercial mortgages, lenders need security in order to reduce risk to themselves. 

What security will I need to provide to the lender?

The main form of security that lenders like for you to provide is property types which are suitable for the lender such as residential or a commercial property. 

The lender will usually require a legal charge over the property put down as security that the finance is being raised for. Depending on the sum of the loan, some lenders consider additional security to support the loan. This could mean that you will be able to borrow up to 100% of the purchase price of the property in question. 

Commercial Mortgages Key Features

Commercial mortgages are similar to regular mortgages in many ways, but there are a few key features that make them slightly different.

There are usually no fixed rates for commercial mortgages. Your rate will be dependent upon how much your loan is and how long you wish to pay it back – amongst other factors your lender will decide on. 

You will usually pay a higher interest rate on commercial mortgages rather than regular residential ones as these types of mortgages are of high risk to lenders. However, due to this high risk you usually need to provide a property as collateral which will allow your lender to give you a better interest rate, as you have put down security. 

If you have a bad credit score you may still be able to apply for a commercial mortgage. However, you may have to pay a higher interest rate in order to make up for the high risk you are to the lender. 

Mortgages are a type of secured loan in which the property itself is often used as security/ collateral by the lender, this means that if you default on any payments, you may lose ownership of the property in question. 

Deposits for commercial loans or mortgages can be quite hefty. So before you apply for your commercial loan you need to ensure that you will be able to pay both the deposit and monthly installments comfortably. 

Lenders prefer to invest in someone who they can be assured will pay them back timely, including interest. If you have not got a lot of experience in trading, many investors / lenders will see that as a high risk. When you have markers that identify yourself as high risk such as lack of experience in trading or a low credit rating, lenders may request for personal guarantees to further ensure that they will not be losing their money.  

Types of commercial finance 

There are several types of commercial finance, the benefits and disadvantages of which depends on your needs and situation. 

Real estate loans are never one size fits all. There are various types of loans that have very different terms, rates and uses. The type of commercial loan you need to get depends on the goal of your loan and how it will be repaid. Loans are broken down into different categories from lenders. Here are some of the more common options on the market.

Refinance loan 

As a dental business owner, you can take advantage of available lower interest rates through commercial real estate refinancing loans. There are various additional fees and costs involved when you are refinancing which can make this option more costly for you. However, when you do a cost benefit analysis, they are usually quite minimal in comparison to your overall savings through lower monthly repayments and less cumulative debt (to banks/ lenders).

Refinancing can boost your profit flow through improvement or expansion of commercial properties. It can also help to pay off any pending expenses you may have.

Property Development Finance

Property development finance is usually used to cover development and building costs, refurbishment costs, but can also be used to purchase a property before renovation. Terms will vary depending on your situation and requirements. However, it is common for lenders to fund up to 70% of development costs over a 24 month term. 

Property Portfolio Finance 

If you have a number of properties in your portfolio, perhaps you own several offices or rent out several apartments, it is likely that you have several, unrelated outgoing loan payments covering all of your properties. Since handling several different loan payments schedules, you may wish to consolidate all your commercial property loan payments into one payment. Property portfolio finance can make it easier for developers and landlords to manage their outgoing debt payments.

Hard money loan

Hard money loans exclusively come from private investors. These investors will be willing to take lending risks based on the value of the commercial property itself rather than the person they are investing in. Banks base their lending on many factors of the business owner themself including their credit score to base their judgement on getting repaid. 

While most commercial loans are made to be long term, especially because of the large amount of money being loaned, hard money loans count as short term financing. They have brief loan terms from just 6 to 24 months. People often turn to hard money loans due to urgency of their situation, which often means that the interest rates of the loan are very high. It can range from 10-18% interest along with costlier up-front administration fees and deposits. 

Bridge loan

A bridge loan is a short-term loan, usually up to one year. These types of loans also have a short approval time which makes them extremely useful when you need immediate funding. It allows the client to meet existing obligations as they provide immediate cash flow. 

Bridge loans are preferable for short term investments for commercial renovations or construction. Bridge loans are also known to have relatively high interest rates and usually need a form of security.  

Term loans (long term fixed interest commercial mortgage): 

These loans are the most standard types of loans you can get. These usually come from a bank or lender and they work similarly to a home mortgage as they carry fixed rates and monthly or quarterly repayment schedules including a set maturity date. 

A term loan usually lasts between 1 and 10 years. When you apply, you need to assess how much money your business needs and how long you will take to repay the commercial loan. 

Short-term loans 

Short term business loans are best for when you need smaller amounts of money that are typically able to pay back within 18 months or less. As these loans are smaller, they have a faster approval process than term commercial loans. Short term loans can even be approved after one day! 

These types of loans are best and most useful for handling emergency repairs, restocking inventory and meeting payroll, amongst a variety of other necessary costs. 

Commercial real estate loans

Commercial real estate loans are for borrowing large amounts of money and have the longest length. These types of loans are for lending very large amounts of money and will help expand your business when you need to buy a new property, such as a warehouse or a secondary office. They are also secured by the property that your business is buying. 

Equipment loans

This loan refers to buying an expensive piece of equipment or other assets for your business. Equipment loans are able be secured by the asset itself, therefore, your business will not have to put up any other forms of collateral. 

Line of credit

With a commercial line of credit, the lender approves your business for a maximum borrowing amount, such as £10,000. After your business has been approved you can then borrow up to this amount whenever you would like. After you repay the funds, you are able to borrow up to this same amount again. This is not a one time loan, line of credit gives you the option to borrow at your convenience. 

Commercial mortgages

A commercial mortgage is simply a mortgage used to purchase a commercial property. They are available to both limited companies and sole traders. Commercial mortgages tend to last for around 25 years and can fund up to 75% of the mortgage. The terms of the mortgage will depend on several factors, such as the profitability of the business. 

Types of Commercial mortgages

There are three main purposes that commercial mortgages can be used for:

Owner-occupied

Commercial mortgages for owner-occupiers either means that a company wants to purchase the current premise in which they operate in or they want to buy a new property to move into. 

Residential buy-to let

A common scenario for commercial mortgages is the purchase of an estate in order to be let out residentially. This is usually used by professional landlords as well as buy-to-let limited companies that are essentially set up for the same purpose. 

Commercial buy-to-let

You can use commercial mortgages for commercial buy-to-lets as well. This means you may want to buy a warehouse in order to let it out to another business to use it for commercial use not residential. This type of mortgage is very similar to residential buy to let, however, the lender will look at various more factors as it can be more difficult to rent out commercial properties to residential properties. 

Advantages of commercial property finance

A key advantage of commercial property finance loans is that you will be able to continue to have sole ownership of your dental practice. You will be able to get a large amount of money for your business without having to give up any equity. Obtaining a commercial loan is not bringing in an investor who will invest in your practice in exchange for a percentage of it. Your money will be upfront, and you will usually have to repay your borrowed money with monthly payments including interest. 

While interest rates on commercial loans are higher than most loans due to the large amount of money, anything that you pay in interest on your loan will be tax deductible. 

Commercial property finance loans usually extend over a long period of time. This gives you a number of years to pay back your loan. Often lenders are more flexible with the repayment schedule to suit your needs.

Commercial loans have a fixed repayment schedule that is suited to you and how much you are able to pay back monthly. There is no risk of unexpected increase of this repayment. The only increase added to your loan will be interest. 

The immediate benefit of a commercial property finance loan is that your dental practice will immediately obtain the money it needs to expand. This enables you to invest in your commercial property immediately, allowing you to substantially build your capital. Property value increases over time, therefore, when your property gains value, your business’ capital will also increase. 

Commercial mortgages have fixed monthly repayments. As the repayment schedule is divided over a long period of time, your repayments are designed to be  manageable for you, even if your loan is a large amount. This means that your loan will enable you to plan and grow your business accordingly, enabling you to structure the finance of your business with certainty. 

When you buy an estate with additional space, there is potential for rental income. You are able to monetise that space by renting out the surplus space in order to generate more income. Subletting any extra space in the property should be done after obtaining lender permission first. 

Disadvantages of commercial loans

A key disadvantage for commercial property finance is that a substantial amount is needed for a deposit on a commercial property loan. 

As the property you invest in will be solely yours, all maintenance, developments and general upkeep costs of your practice will need to be taken care of by you. Unfortunately this can often end up being very costly.

Property prices are continuously fluctuating and can sometimes affect the value of your property which can result in reduced capital. This could also affect your finances and future borrowing capabilities. 

If you have a variable rate mortgage on your commercial property, then any rise in interest rates will result in your monthly repayments becoming more expensive for you. 

Types of commercial real estate

Apartment buildings 

Apartment buildings are classified as commercial real estate if they have five or more living units. Any buildings that have four or fewer units inside are classed as a residential property.

Retail buildings

Retail buildings are any buildings that are selling goods. This includes stand alone shops as well as larger commercial properties such as malls and shopping centres that have multiple stores inside the property.

Office buildings

Office buildings are usually the most sought after when they are up for sale, they are also usually the most expensive. Most office buildings are located in urban business districts, which makes them prime locations, which is why they are so expensive. The further your property is from the commercial business district, the further down the prices go. 

Medical facilities 

Medical facilities include dental practices, GP doctor surgeries, hospitals (with large staffs and 24 hour, round the clock care), surgical centres, urgent care clinics (walk ins) and nursing homes (long term accommodations). 

Hotels and resorts

This category includes hotels and luxury resorts as well as casinos, big corporate chains and independent ins. 

Land developments

Land development refers to commercial real estate developers. This is turning raw, empty land into a space for future construction. If this is done correctly, there is a lot of potential for a significant financial return. 

How do commercial loans work?

If you choose to go for a commercial loan, you need to understand that you will need to pay back the loan over time as well as interest. Before your lender will invest in your business venture, whether it is a private lender or a bank, they will need to see proof that your business will be able to make its repayments. 

In order to increase your chance of getting a commercial loan, prepare documents of your income and revenue in order to support your application. Your financial statements, profit and loss margins, will help your lender be drawn to you as a successful low risk client. You may even need to value your assets to use as security to put as collateral to ensure you receive your loan.

How long does it take to secure a commercial loan?

Smaller loans are usually easier to obtain. If you have a good credit history and have all the necessary financial documents ready for your loan to get approved, it is able to get approved within a matter of days. 

For a larger commercial loan, your application may take a lot longer. It could range from a couple weeks to a couple months. It is highly dependent on the amount you want to borrow and the length of the term. For a very long term loan, the lender often would wish to perform extensive examination of your financial records to confirm the financial viability of your business over the term of the loan. Loans of very large amounts often require security as well as a deposit. 

What type of security do I need for commercial property loans?

The most common things that are offered as security for commercial loans are vehicles, property and shares. The property you put up for collateral could be your business premises or your personal property. Many traditional lenders accept only these options as types of security.

The asset you put up as security acts as protection for the lender against a potential loss if your business falls through or your are default in your payments. The assets you put up for security compensate for the unreturned borrowed money.

How to avoid funding your business from personal assets

Commercial loans are one of the most efficient ways to fund a particular project, business venture or acquisition. You can get this loan on the simple basis of your business plan and how likely your business is to succeed. You do not need to put your personal assets in the mix to fund your estate. 

With a commercial loan it is also simply just borrowed money with interest added. Commercial loans allow you to fund your business with a loan without having to get an investor or partner to share your business with minimising your profits. The only personal assets that should be involved are the ones that you put up for security with your lender.

What is bridging finance?

Bridging finance is a type of commercial property finance which is used by companies and sole traders to quickly fund the purchase of a property. Traditional commercial mortgages can take months to arrange. Bridging finance companies can lend money much faster. The loan will usually be secured against a charge of the property you are purchasing.

How much can I borrow?

It is highly dependent on the type of property being purchased, you can borrow up to 85% of the purchase price or valuation for residential properties. You can borrow up to 80% if you are purchasing a commercial property. 

Should I compare business mortgages?

Comparing different mortgage deals will help educate you on the different types and terms there are out there. There are often people and websites who will be able to compare for you to ensure the best and cost effective solution for your business. 

Alternatively, use a commercial finance broker to do that hard work for you!

Click here to read our blog on How to finance a healthcare business

Reviewed By:

Nigel Crossman

Head of Commercial Finance

Nigel is a former banker and head of commercial finance at Samera. He specialises in raising finance, negotiating deals and structuring finance applications for healthcare businesses.

Dan Fearon

Finance Manager

Dan is a former banker and the head of our dental practice sales team. He specialises in asset finance for healthcare businesses and dental practice sales.