Business owners looking to improve cash flow and unlock hidden equity from commercial property could be missing out on significant opportunities by approaching a remortgage unprepared.

When a business has a commercial mortgage, a major benefit is long-term stability, with repayments usually spread over 10 to 25 years. Similarly, because commercial mortgages are secured against property, they often come with lower interest rates, acting as another huge advantage.

Commercial remortgages are also a great strategic tactic to help improve cash flow and increase capital due to both the loan length and competitive interest rates.

However, unlike standard residential mortgages, commercial mortgages are bespoke and often pose a higher risk to lenders due to the dependent nature of the relationship.

Repayments are tied to trading income, and recessions or economic shifts can instantly decrease property value, often meaning that they are not always the easiest route for businesses to take. Even when a commercial mortgage is secured, remortgaging continues to raise these challenges, making it imperative for businesses to take well-considered action.

However, with the correct groundwork and research, this does not need to be seen as a daunting option, as Kelly Moody, Senior Property Finance Broker at Approved Business Finance Group, shares advice on how businesses can best position themselves for a successful commercial remortgage application.

Stay informed on the property market 

The significance of commercial mortgage rates cannot be overstated, and it is crucial that borrowers get to grips with the various economic factors that impact commercial remortgaging.

Mortgage rates often mirror the wider economic climate in which they operate. Factors like monetary policy, demand, and the overall health of the sector are all key components that interplay to create the market state.

Aspects like inflation, Gross Domestic Product (GDP) growth, and employment rates also affect the market. Rates may increase (or decrease) to match inflation levels, and a high GDP growth signal can also lead to higher rates, and vice versa.

If employment rates are strong, this suggests a strong economy where businesses are more likely to achieve success, therefore reducing risks to lenders. In this case, rates may increase to reflect this lower risk.

Similarly, understanding what the demand is like is essential. If demand is high, naturally, rates may spike to capitalise on increased demand. Alternatively, in markets where things are slower, rates may also reflect this to help attract borrowers.

Financial housekeeping

Though it may seem obvious, the most crucial part of ensuring a smooth commercial remortgage process is sorting out the necessary documents to make everything clear to the lender. Ultimately, businesses need to prove their ability to afford the loan and mitigate perceived risks, and commercial loans scrutinise cash flow and balance sheet health to determine eligibility.

Refinancing requires extensive paperwork, meaning that if certain documents are missing, then the process may be delayed. Essential documents such as proof of identity and address, incorporation documents, and details of company directors should all be accessible to the lender. Assets and liabilities, income and expenses, and credit reports are all necessary to help lenders assess eligibility.

Lenders will also need to see at least two years of accounts for established businesses, including profit and loss statements as well as balance sheets. If a business is still relatively new, lenders need to see a detailed business plan and financial projections.

Details of the property are just as important, alongside the basics such as address and current use; a full property valuation report is required. A property valuation report is carried out independently and provides evidence-based details to formulate an estimate of a property’s market value at a specific point in time. It also identifies any potential risks tied to the property, tenants, or location.

It’s important to note that if any issues are raised during a property valuation, it’s important to address and rectify them before going through the commercial remortgage process. If unaddressed, these factors could significantly affect the value and, therefore, impact the amount lenders are willing to extend.

Remaining loan terms

While the perks of commercial remortgages are a huge pull factor for businesses, it may not always be the most suitable option to unlock capital or increase cash flow. If the existing commercial mortgage is close to being paid off, it may sometimes be better to wait until the current mortgage expires before seeking out a new one.

Commercial remortgaging depends heavily on a volatile market, and with so many external factors at play, it isn’t always an easy fix.

However, if businesses need quick access to capital, there are alternative financing options available.

Asset refinancing is a great option to help businesses access capital from existing assets, without losing access to them, and ensuring that activity can carry on as usual.

A huge advantage of asset refinancing is that access to cash is immediate, contrasting with the length of time it can take for a commercial remortgage to complete. Similarly, repayments can be spread over time, or multiple loans can be combined and made into one manageable repayment, giving businesses the flexibility to suit their unique needs.

Short-term business loans are also an ideal solution for businesses that need immediate access to money without the commitment of a long-term loan. These loans have a typical repayment term of 3 to 12 months, allowing businesses the flexibility to repay on their terms without disrupting cash flow.

Kelly Moody, Senior Property Finance Broker at Approved Business Finance Group, said:

“Commercial remortgaging is an incredibly powerful tool for business owners looking to improve cash flow, lower monthly overheads, and release untapped equity to help fuel and maintain growth.

“However, because remortgaging is closely tied to economic shifts, and because every business is unique with bespoke needs, they cannot be treated as a quick and easy solution.

“This does not mean commercial remortgaging is not an option, and businesses should not be deterred by the process.

“By keeping documentation in order, ensuring good bookkeeping, and staying informed on market trends, businesses can transform what could be a lengthy and daunting process into a strategic business move to unlock hidden potential and keep businesses going from strength to strength.”