Commercial property finance can easily become a conversation about the asset.
What is the property worth? What loan-to-value will the lender consider? How much equity does the borrower need to contribute?
Those are important questions. The property is the lender’s security and will inevitably influence the amount and terms of borrowing available.
But for an owner-occupied business, I believe there is a more important place to start:
What does the business need the finance to achieve?
Because a commercial mortgage that works against the property value can still be poorly structured for the business sitting behind it.
The Property Tells Us What May be Possible. The Business Tells Us What Is Appropriate
A valuable commercial property can provide strong security.
That does not necessarily mean the business should maximise the debt available against it.
The borrowing still needs to be serviced from somewhere.
For an owner-occupied property, that will often mean understanding the underlying trading business: its profitability, cash generation, existing commitments and plans for the future.
A business investing heavily in growth may need a very different structure from an established company generating predictable cash flow.
Similarly, a business expecting to acquire another site, invest in equipment or recruit significantly over the next few years may place a greater value on retaining liquidity.
The property value helps establish the lending parameters.
The business plan should help determine the structure within them.
Start With What The Business Is Trying To Achieve
Before looking at a commercial mortgage in isolation, I want to understand why the business is borrowing.
Is it acquiring premises rather than continuing to rent?
Is it refinancing existing debt?
Is capital being raised from a property already owned by the business?
Is the property part of an expansion strategy?
Does the business expect to occupy the premises for the long term, or could its requirements change as it grows?
Those questions matter because the answers can influence the appropriate term, repayment profile and level of leverage.
The objective is not simply to complete the property transaction.
It is to make sure the debt supports what the business intends to do next.
Debt Service Needs To Reflect The Realities Of The Business
A lender will naturally want to establish whether the business can afford the proposed borrowing.
That assessment often involves looking at historic accounts, profitability and debt service cover.
But the numbers need context.
A set of accounts may include exceptional expenditure, changes in director remuneration or investment made to support future growth. Conversely, a particularly strong period of trading may not necessarily represent sustainable earnings.
Understanding the business behind the accounts is therefore critical.
The purpose is not to explain away genuine weaknesses or make unaffordable borrowing appear affordable.
It is to ensure the lender has a clear picture of the underlying trading position and can assess the debt on an appropriate basis.
The Repayment Profile Can Affect The Business Plan
How quickly a commercial mortgage amortises can have a significant impact on cash flow.
A structure requiring substantial capital repayments may reduce debt more quickly, but it also means more cash leaving the business each month.
For some borrowers, that may be entirely appropriate.
For others, particularly businesses investing in expansion, stock, people or equipment, preserving more working capital may be important.
Interest-only periods or different amortisation profiles may warrant consideration where available and appropriate.
The important point is that repayment should not be considered purely from the lender’s perspective.
The borrower also needs to understand how the debt will interact with the capital requirements of the business.
Maximum Leverage Is Not Always The Objective
There can be a tendency in commercial property finance to focus on the maximum loan available.
But maximum leverage and appropriate leverage are not necessarily the same thing.
Borrowing more may allow the business to retain capital for other purposes.
It can also increase servicing costs and reduce resilience if trading conditions deteriorate.
Borrowing less may reduce debt costs but require the business to commit capital that could otherwise support growth or provide a liquidity buffer.
There is no universal answer.
The appropriate balance depends on what the business needs its capital to do.
Future Investment Needs Should Be Considered Today
One of the risks of looking only at the immediate property transaction is committing too much of the business’s borrowing capacity or liquidity at the outset.
A company may have plans to open another location, acquire a competitor, invest in machinery or undertake significant refurbishment.
Those plans may require capital later.
If the commercial mortgage has been structured without considering them, the business could find itself with a valuable property but insufficient flexibility elsewhere.
That is why understanding the forward business plan matters.
The financing should ideally leave the borrower in a position to execute that plan rather than constrain it unnecessarily.
The Exit Should Form Part Of The Original Decision
Commercial debt also needs an end point.
Will the facility amortise over its full term?
Is refinancing likely to be required?
Could the property eventually be sold?
Might the business relocate or dispose of the asset as part of a future transaction?
Thinking about those possibilities before the debt is agreed can influence the structure selected today.
A facility that looks attractive at completion may be less appropriate if it creates a difficult refinancing position several years later.
Commercial Mortgage Advice Should Start With The Business
At Henry Dannell, we believe commercial property finance should be considered in the context of the business it is there to support.
The property matters.
So do the valuation, loan-to-value and lender terms.
But they are only part of the picture.
We want to understand the business’s profitability, cash flow, existing liabilities, capital requirements and future plans before determining how the property debt should be structured.
For me, that is the distinction between simply raising finance against an asset and structuring commercial debt properly.
The property may provide the security for the loan. But the business plan should help shape the borrowing.
Commercial lending is subject to individual circumstances, lender criteria and availability. Property offered as security may be at risk if repayments are not maintained.
