When you apply for an ordinary residential mortgage, it’s all fairly straightforward. The loan is secured on the house you are buying. If you fail to keep up your payments, the lender will repossess the house and sell it to repay the loan.
For people applying for commercial mortgages in the UK, it’s a bit more complicated. It’s basically the assets of your company that are being used as security. This can include property, but can include other things as well.
The commercial mortgage can of course be secured on the property you are purchasing, if that is the reason why you are applying for the loan. If you are borrowing the money for other reasons, it can be secured on existing commercial property owned by the business. It can also be secured on residential property owned by yourself or your co-borrowers if any, or by directors of the business. This assumes of course that there is sufficient equity in the property. And you must be very aware of the risks involved.
In the case of UK commercial mortgages, it is quite usual to use equipment as collateral – but it does depend on what equipment it is. The working life of the equipment must be at least as long as the period of the loan. So computers, for example, are likely to become obsolete and lose their value quite quickly, so would not be accepted as collateral for the loan. On the other hand, factory equipment, for example, keeps its value for much longer and could be accepted as security.
It is also possible to use revenues as security for commercial mortgages. This is much more likely to be accepted for a long-running business than for a new start-up. The lender will analyse the revenues and look for a pattern of growth over a period.
When lenders look for security for a commercial mortgage, they are looking for whatever they will be able to sell if you default on the mortgage. So they will evaluate the entire assets of the business.
The main thing to remember is that whatever you use as security, you will forfeit it if you fail to keep up your payments. So first and foremost, make sure you come up with a business plan that is as sound as possible.
Please note that the FSA do not regulate commercial loans or commercial mortgages