Understanding commercial finance

By Steve Sanderson, Bridging and Commercial Specialist, Clever Lending

For residential brokers unfamiliar with the commercial finance sector, knowing where to start when it comes to placing business can be a daunting task. At first glance, this area of the market can appear to be rather complex, with different levels of financing required depending on the type of project undertaken.

However, the reality is that commercial finance is actually not too far removed from the residential sector. In fact, in many cases, the documents required during the application process for a commercial purchase for a trading business seeking finance are almost no different to those needed when buying a residential property.

For example, in the case of a residential owner-occupied purchase, brokers would conduct an affordability assessment based on the client’s personal income against any credit and background debts that may impact how much they can borrow.

These same measures are also used in commercial property purchase cases, but the affordability assessment used to determine how much the business can afford to borrow is based on income from the business’ trading accounts, rather than the business owner’s individual account.

Similar comparisons can be made when it comes to meeting any remortgaging requirements, with the same considerations for a commercial property purchase and a residential remortgage needed around rate switching, debt consolidation and capital raising to ensure the best deal.

How commercial finance compares to the BTL process

Residential brokers who occasionally dabble in the buy-to-let (BTL) sector should also be aware of the similarities between this area of the mortgage market and the commercial mortgage investment space, as being aware of how affordability is assessed could allow them to tap into another revenue stream within the market.

All BTL purchases are based on rental income and both the individual’s accounts and the business’ accounts are considered to ensure the mortgage is affordable. However, the main difference with a commercial investment purchase is that in addition to rental income, other factors such as the type of tenant and lease covenants such as the terms of the lease and break clauses included in the agreement will also need to be considered.

It is also worth noting that most commercial mortgage lenders do not just offer commercial mortgages, they will also consider financing BTL purchases. So, if a broker comes across a BTL case that is more complex than usual, there is probably a commercial lender that will take it on, so it is worth exploring the options available rather than turning away the business.

Commercial finance is not as complex as you might think

Although this area of the market may initially seem a tad more complicated, in reality, it is actually pretty straightforward and brokers should be aware that they don’t have to jump through as many hoops as they may think in order to place the business.

Any complexities arising in the commercial mortgage space usually come within the required documentation, rather than in the process itself and that ultimately, a commercial purchase mortgage for a trading business is affordability driven just like a residential purchase, while a commercial investment property is no different from BTL.

Admittedly, this area of the market may appear complex, but being aware of the overlap in how loans are calculated and drawing comparisons between the affordability assessments required in each of the different scenarios, will help brokers identify what is needed when working out loan serviceability.

Given the nature of the commercial property market and the fact that no two projects are ever the same, working with specialist firms like Clever Lending can also help those brokers needing further support when seeking this type of financing for their clients.

We understand that although commercial finance is simple in its concept, it is complex in its arrangement, which is where we can help. As specialists in this area, we can assist you in navigating the intricacies of this niche area of the mortgage market and provide your clients with the financing they need, leaving you free to focus on any residential clients in need of your advice and expertise.