Commercial Mortgage for Small Business UK

What is a commercial mortgage for a small business?

A commercial mortgage is a loan secured against commercial or mixed-use property by way of a first legal charge. The property acts as security: the lender holds the charge until the loan is repaid in full. Unlike a residential mortgage, which is assessed against personal income, a commercial mortgage for an owner-occupying business is assessed against the trading performance of that business.

There are two distinct types relevant to small businesses. An owner-occupied commercial mortgage is used when the business purchasing the property will trade from the premises: a retailer buying their shop, a manufacturer purchasing a factory, a solicitor buying their office. Affordability is assessed against the business's accounts. A commercial investment mortgage is used when the property is purchased to let to a third-party tenant. Affordability is assessed primarily on the rental income and the tenant's covenant strength rather than the borrower's own trading performance. This guide focuses on owner-occupied mortgages for trading businesses.

How much can a small business borrow on a commercial mortgage?

The amount you can borrow depends on three things: the value of the property, the strength of your business trading accounts, and the lender's appetite for your sector and structure.

Property value and LTV. Most lenders advance 65% to 75% of the commercial property's value. A property worth £600,000 will typically support a loan of £390,000 to £450,000, requiring a deposit of £150,000 to £210,000. Some lenders will go to 80% LTV for strong trading businesses in lower-risk sectors. Professional practices such as dentists, GPs, solicitors, and accountants can sometimes access up to 90% LTV due to the lower perceived risk profile of those business types.

Business income and DSCR. Lenders use a Debt Service Coverage Ratio to assess whether your business generates enough profit to cover the mortgage repayments with a margin of safety. Most require a DSCR of 1.25x to 1.3x, meaning your annual net profit before finance costs should exceed your annual mortgage repayments by 25% to 30%. A business generating £80,000 net profit per year could typically support annual mortgage repayments of around £60,000 to £64,000.

Sector risk. Lenders adjust both LTV and rate based on their view of sector risk. Professional services, light industrial, and office premises are considered lower risk. Hospitality, leisure, care, and licensed premises attract more scrutiny, higher deposits, and narrower lender panels. Lenders have tightened criteria on hospitality in particular since 2020 and we are still seeing the effects of that in what some panels will accept.

Loan terms. Borrowing over a longer term reduces the monthly repayment but increases the total interest cost. A £400,000 commercial mortgage at 6.5% over 20 years carries monthly repayments of approximately £2,980. The same loan over 10 years carries repayments of approximately £4,540. The right term depends on your business cash flow, your plans for the property, and the lender's maximum term for your sector.

Fixed rate versus variable rate commercial mortgages

The choice between a fixed and a variable rate is one of the most consequential decisions in a commercial mortgage. Both have genuine advantages depending on your business's position.

Fixed rate mortgages lock in your interest rate for a set period, typically 2, 3, 5, or 10 years. Your monthly repayments stay the same throughout the fixed term regardless of base rate movements. This makes budgeting predictable and protects you if rates rise. The trade-off is that early repayment charges apply if you repay or refinance before the fixed period ends. For a business wanting certainty and planning its finances over several years, a fixed rate is usually the more sensible choice.

Variable and tracker rates move with the Bank of England base rate plus a fixed margin, for example Base Rate plus 2.75%. If rates fall, your repayments fall. If rates rise, they rise. Variable rate mortgages typically carry lower or no early repayment charges, which suits businesses that may want to repay early or refinance. The risk is cash flow unpredictability if rates move against you. With the base rate having fallen from 5.25% to 3.75% between 2024 and early 2026, borrowers on tracker rates have benefited. Whether that continues depends on Bank of England decisions outside anyone's control.

Factor	Fixed rate	Variable / tracker rate
Repayment certainty	Payments stay the same for the fixed period	Payments move with the base rate
Rate environment benefit	Protection if rates rise	Benefit if rates fall
Early repayment charges	Usually apply during fixed period	Often lower or absent
Flexibility	Lower: repaying early is expensive	Higher: easier to exit or overpay
Typical fix period	2, 3, 5, or 10 years	N/A (moves monthly)
Best suited to	Businesses wanting budgeting certainty	Businesses likely to exit within the term

What commercial property can a small business commercial mortgage fund?

Commercial mortgages for small businesses can fund a wide range of property types, provided the lender is satisfied with the sector, the property's marketability, and the borrowing entity.

Common uses include purchasing a shop, office, or industrial unit for the business's own occupation; refinancing existing commercial premises to secure a better rate or release equity; buying the freehold of currently rented premises from a landlord; funding a significant refurbishment where long-term finance makes more sense than short-term bridging; and acquiring a business where the purchase includes freehold property, such as a hotel, guest house, or convenience store with accommodation above.

Properties that typically fall outside standard commercial mortgage criteria include empty sites or land without planning consent, properties in very poor structural condition, properties in declining micro-markets with limited comparables, and specialist or single-use premises with no alternative use. For properties requiring significant works before they are mortgageable, a bridging loan followed by a term commercial mortgage is often the right structure.

What do lenders assess when a small business applies for a commercial mortgage?

Trading history and accounts. Most lenders require at least two to three years of certified or audited accounts plus current management figures. Some specialist lenders will consider businesses with two years of accounts and strong projections. We do not arrange commercial mortgages for businesses with no trading history.

Business and personal credit history. Lenders check both the business credit profile and the personal credit history of the directors. Adverse credit does not automatically disqualify you, but it narrows the lender panel, typically increases the deposit requirement, and will result in a higher rate. Historic adverse that is well explained and more than two to three years old is treated more favourably than recent adverse.

Security and personal guarantees. The property itself is the primary security, held by first legal charge. Most lenders also require personal guarantees from the directors, meaning you accept personal liability if the business cannot service the debt. Some lenders also take a debenture over the business assets as additional security.

Property suitability. The property must be acceptable to the lender as security. A commercial valuation is required in all cases. Lenders consider the property's location, condition, use class, and alternative use value. A well-located office or industrial unit in an established market is straightforward. A specialist leisure property with limited alternative use requires a specialist lender with appetite for that asset type.

How to apply for a commercial mortgage as a small business

A commercial mortgage application follows a set sequence. Getting the documentation right before you start and working with a specialist broker reduces delays at every stage.