Do You Need A Deposit With A Business Loan?

If you are looking to buy commercial premises for your business to operate from whether it be a garage to carry out servicing and repairs to motor vehicles, a shop premises to sell fruit and vegetables or office premises to run your solicitor’s practice from then it is quite possible that you may require support from the likes of a bank in the form of a business loan to assist in the purchase of the premises. If that is the case then will you have to make a contribution towards the purchase price of the commercial premises?

The answer is almost certainly going to be “yes”. The bank, building society or other lender is likely to require you to make some form of contribution towards the purchase price of the property. This is known as a deposit.

As a general rule and as a guide, a lender will usually require a deposit of around 30% of the purchase price or valuation of the commercial premises whichever is the higher.

The main reason why a lender will require a deposit is to reduce its exposure to risk of loss. Let’s look at an example: –

Purchase price/valuation of commercial premises £200,000
Deposit £60,000
Borrowing requirement £140,000 (70%)

Let us assume that the business venture did not work out and it ceased to trade leaving a balance outstanding with the bank of £160,000. The business premises are sold on a forced sale basis for £160,000 thus clearing any outstanding balance.

Now let us examine another set of figures.

Purchase price/valuation of commercial premises £200,000
Deposit £40,000
Borrowing requirement £160,000 (80%)

Let us assume that the business ceased to trade leaving a balance outstanding with the bank of £180,000. The property was sold for £160,000 due to a downturn in commercial property prices thus leaving the lender with an outstanding liability of £20,000.

As you can see, the lender with the LTV of 70% did not suffer any financial loss whereas the lender with the 80% LTV lost £20,000 that it will no doubt pursue the borrower for.

So, if you are a business owner, as a general rule, you will be expected to find a deposit of at least 30%. It is worth noting that by finding a larger deposit may mean that the interest rate is lower as the lender’s risk is less.
If you are seeking a business loan then why not get in touch with us here at Commercial Mortgage Link and we will look to introduce you to a specialist, experienced broker who has an extensive portfolio of lenders on their panel.

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