Commercial mortgages are heavily customised to the borrower’s circumstances and the application and assessment process is often complex. Lenders will request extensive financial information on both the borrowing company itself and its executives and key personal. However, the process is not standardised and is often dependent on the specifics of the loan and the lender’s internal processes.
To give you the inside track and allow you to prepare for your commercial mortgage application, we’ll discuss what documentation lenders will typically ask for. Lenders may differ in whether they require this information directly on the mortgage application, or whether it is requested subsequently, after an initial pre-screening. Often, the application process will require the borrower to state information for which the lender will subsequently request evidence.
The business information you have to provide will depend on whether the property will be owner-occupied (i.e. your company is the tenant) or for investment (where the property is let to a third-party business). For owner-occupiers, the lender will request the businesses’ accounts or trading figures for the previous two or three tax years, and the management accounts for the current year. This will include:
- Profit and loss (or income statement) – Showing the businesses’ revenues, major expenditures and profitability.
- Balance sheet – Lays out assets and liabilities, especially the cash position, and major assets such as property and equipment, and outstanding debt.
- Cash flow statement – Detailing cash in and out of the business. This is necessary since profit and loss statements are made on an accrual basis and do not represent the cash position of the company. A lender will usually want to verify the recent history by requiring several months (typically 3-6) of the businesses’ bank statements.
Additionally, a lender will require other information which may give a broader picture of the businesses’ future prospects.
- Company credit record and borrowing history
- Financial projections of revenue and costs – This is especially important if the current financial situation is not representative of the businesses’ expectations in the near future.
- Business plan – Essential for new businesses without a trading history
However, for investment borrowers, the lender is more focused on assessing the cash flow potential of the property itself, rather than the creditworthiness of the borrower. Lenders typically prefer commercial property to be tenanted – i.e. have an existing tenant at the time the mortgage is extended. Lenders will ask for a copy of the leasehold or tenancy agreement and details on the tenant. In addition, the lender will request the details for any other mortgaged properties the borrower owns, to assess the financial health of their investments and determine if the borrower could become financially stressed due to cash flow problems in their wider portfolio.
Secondly, for both owner-occupier and investment borrowers, the lender will want disclosure on the personal financial situation of key people. This documentation will typically be required for all directors and major shareholders, as lenders will want to understand who runs the business, their liquidity and resources. This will often consist of:
- Proof of ID and address – This allows the lender to run background and reference checks.
- Proof of assets, liabilities, income and expenditure – typically including personal bank statements and possibly payslips or tax records.
- Personal credit rating – This can be important as, for companies with only a limited trading history, it is not uncommon for directors to be required to offer personal guarantees on the mortgage.
- Career history – For owner-occupiers the lender has not previously dealt with, and especially for new businesses with limited or no trading history, lenders will also expect to see evidence of the professional experience of directors in the same line of business.
It is only once they are satisfied that the borrower is sufficiently creditworthy that the lender will assess the property and conduct their own valuation. If they are satisfied that the premises has been valued accurately, they will engage their solicitors to conduct legal due diligence and draw up a mortgage contract. At this point, the lender will formally extend the offer, and your loan is on its way!
A commercial mortgage broker will be able to match you with the best commercial mortgage lender for your circumstances, and help you present and submit your application with the relevant documentation. You can find the UK’s top advisers in our commercial mortgage broker directory.
