One of the largest fixed cost items that a large part of all entrepreneurs has to deal with is the rent of a commercial property or office space. The reason why relatively many entrepreneurs still rent commercial properties instead of buying them is that buying such a property naturally entails long-term responsibilities and obligations, and therefore also uncertainties. However, the purchase of a commercial property can offer significant advantages; that's why there are corporate mortgages. But when is it smart to take out such a mortgage?
What is a corporate mortgage?
The name says it all: a business mortgage is a business loan to buy or renovate a commercial property. The principle is very similar to the private loan, although there are some differences. Commercial mortgages are offered by banks that provide business services.
Commercial mortgages often do not cover the full purchase value of a commercial property, but about seventy percent. In practice, you often supplement the company mortgage with your own money, or possibly with money from an entrepreneur's loan.
Unknown to many entrepreneurs
Relatively few entrepreneurs use commercial mortgages in the Netherlands. This is partly due to the 'rental culture' in many business sectors. In the Netherlands, you see a relatively large number of companies that continue to rent their business space for years, despite the fact that purchasing the property (or another property) would be financially cheaper.
Flexibility - a lease can be dissolved more easily than a mortgage, should things deteriorate or the company be wound up - is considered more important than financial benefit. However, that is not always a rational decision. After all, you have become an entrepreneur because you would like to earn your own sandwich. Then it also makes sense to reduce your necessary costs as much as possible.
Differences from retail mortgages
The business mortgage is similar to the 'normal' mortgage, but has some important differences. First, there is less government involvement in corporate mortgages. This means that you cannot claim such things as mortgage interest deduction or mortgage guarantee. The risks are therefore slightly higher on the side of both the buyer and the mortgage provider, which is reflected in somewhat higher interest rates (often one percentage point) than with private mortgages. In addition, you can repay corporate mortgages faster (often within twenty years) than retail ones and there are usually more options for paying off extra, penalty-free in the meantime.
When should you consider a corporate mortgage?
It becomes a business mortgage to consider worth it once your business has been stable for a while (at least twelve months). When applying for such a mortgage, you will always have to demonstrate that your company is financially healthy and stable. You can use such a mortgage for three purposes:
- Buy the business space you rent now;
- Buy or realize a new business space;
- Renovate or expand your current business space.
The third option in particular is by no means always known to entrepreneurs.
Especially when you now have a lot of costs in renting a commercial property, considering purchasing a property through a commercial mortgage is very interesting (which is also called a commercial mortgage called). You have to realize that you are entering into a long-term commitment, so you have to be relatively sure that you want to remain an entrepreneur in the future. It is often possible to repay or transfer a commercial mortgage in full, but the remaining interest must then be paid, so it can be a costly affair.
The advantages and disadvantages of a business mortgage
If your company can bear the financial obligation of a mortgage, there are several advantages. You not only save on rental costs - which are often much higher than the mortgage payment - but you also invest in a property that is likely to increase in value. This makes taking out a company mortgage not only a cost-saving move, but also a smart investment.
What you have to realize is that as an owner of a commercial property you will have to deal with some additional cost items, such as property tax, maintenance costs and necessary insurance.
Finally, there is one more exceptional situation in which the company mortgage can also be valuable: if you already own a business space that has been partially or fully repaid, you can take out a company mortgage to convert the value of your property into cash. This way you can use the released money to invest in your company, instead of being stuck in stone. This allows you to grow your business faster and you do not have to take out entrepreneurial credit.
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