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Bad credit commercial mortgage

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

Bad Credit Commercial Mortgage Guide

You may be worried that bad credit will affect your ability to get a commercial mortgage; however, options are open to you. This guide is here to help as we deep dive into the world of bad credit commercial mortgages and answer your questions.

We will look at factors that may affect the decision, how you can improve your chances of being accepted and how you can secure the mortgage you need.

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Is It Possible To Get A Commercial Mortgage With Bad Credit?

It may seem impossible to get a commercial mortgage if you or your business has experienced bad credit. Still, some commercial lenders will show a little more flexibility and consider your application when others won’t. A mortgage advisor will be able to give you an idea of what you may be able to do; however, each lender has very different criteria.

You need to know all the details of your current financial situation, whether the business has experienced adverse credit or your personal credit score has issues. Some specialist lenders will be able to give you mortgage advice, but it is useful if you know as much information about the process and your options before you begin your application.

Mortgage lenders have specific criteria for lending, but the most important factor is that they need to be confident that you will be able to afford the repayments. This is when bad credit can cause problems.

If you have an adverse credit history, it could be concluded that you cannot make repayments, so the mortgage lender may refuse your application.

There are many reasons why your credit score may be poor; these can be anything from missed payments to CCJ’s or repossessions. Therefore, checking your credit score to know where the problems occurred is a good idea.

Default on your file

A default on your credit file means you have missed a payment. This will show potential lenders that you have been unable to keep up with repayments in the past, which is a red flag for any lender.

It does depend on how long ago the default occurred. For example, in the last six months, it doesn’t look promising. However, if it was over 12 months ago, it may be looked upon more favourably as time has passed where you have kept up with regular payments.

It also depends on how frequently you have defaulted. The occasional missed payment a while ago looks better than frequently missed payments recently.

There may have been a genuine reason for a default, but banks won’t necessarily be interested in the reasons and will just go by what they see on your credit file. Numerous defaults can be damaging and cause future credit issues.

A repossession on your file

Repossession on your credit file can be very troublesome. This refers to the lender taking possession of the item that was put up as security on a secured loan. This could be a property in the case of missed mortgage repayments and would allow the lender to sell the property to recover the costs.

This is a big red flag to mortgage lenders as it shows again that you were unable to make repayments and frequently defaulted. The repossession will stay as a negative on your credit report for six years; however, even after it is removed, if you are asked if you have ever had anything repossessed, you are obliged by law to declare it.

If you have been subject to repossession in the past, this will reduce your options for being accepted for new credit. Some lenders will view it as an automatic no, whereas others will require extra security to counter the risk of this happening again.

Poor credit score

Your credit score is based on an analysis of your credit history and files and is used to determine your creditworthiness. A negative assessment by a credit reference agency will reduce your financial options – the more negative activity such as defaulting, the fewer options for applying for financial products.

You also need to be aware that the more you apply for financial products, the more so-called ‘hard searches are done on your credit file. This hurts your score, especially if you are applying for lots of things repeatedly.

If you are rejected for credit, this will also go against you on your credit score. This is why it is important to get the right advice and apply only to a lender you believe will suit your needs; this reduces the possibility of being rejected.

The good news is that your credit score is not fixed and can be improved over time by ensuring all payments are made, and there are no defaults, CCJ’s or repossessions. You need to be able to maintain your credit rating for a long period of time, usually between 6 to 12 months, to improve it, but it can be done.

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Other Factors That Will Affect A Lender’s Decision

Business profits

Commercial lenders will want to know details of the business for the previous year, including your net profit, annual turnover and earnings before tax. In addition, they need to know how well the business has been doing and the predicted profits for the year ahead.

This is where enlisting the help of a professional commercial mortgage broker is useful as they will take the time to understand your business and be able to direct you to the most appropriate lender based on your needs.

Deposit and security

Commercial mortgage lenders will look at how much of a deposit you are able to put down. The deposit for bad credit commercial mortgages is usually between 25% and 40% depending on the risk level; however, if you have a bad credit history, lenders will often ask for the higher end.

The more of a deposit you can get together, the higher the chance of acceptance, even with a bad credit rating. The repayments are offset by the deposit, so the larger the deposit, the less the lender has to lend, making it easier for you to get a commercial mortgage.

It is possible to use another property you own as security against the new loan; however, this depends on how much equity you own. The repayments you will make are offset by the value of the property you used as security. Be aware that if you use another property as security, there is a risk it may be repossessed if you can’t keep up with repayments.

Length of time in the industry

Lenders will typically want to see that you have been in the industry for a length of time. This varies from lender to lender; however, being in your line of business for a while will show the lenders that you are serious about your business, which can go in your favour in the application process.

The longer you have been in business, the more evidence you will have of growth and profits as well as business statements and proof of earnings; this will all go in your favour with a commercial lender.

Upcoming business plans

It is important when putting together your bad credit commercial mortgage application that you have a strong business proposition. Your calculations and predictions for the future of your business need to appeal to your chosen lender. This all ties in with being able to prove that you will make the repayments on time and regularly.

Bear in mind some lenders are more likely to agree to a loan on certain projects than others, so always research which lender is most appropriate to you and your current needs and financial history. Again if you are unsure, the help and support from a broker will be invaluable in making sure you apply to the right kind of lender for your individual needs.

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How To Get A Commercial Mortgage With Bad Credit

The best thing to do if you are thinking about applying for a commercial mortgage but have bad credit is to seek mortgage advice from a specialist commercial mortgage advisor and broker. They will be able to advise on what your options are, the potential interest rates available and the deals to look out for as well as take a look at your credit rating without it affecting your score by doing a ‘soft search’.

A professional broker can find the best deals specifically tailored to your needs and may be able to negotiate better interest rates on your behalf. This is particularly useful when your credit rating is poor, as automatically, you are going to have to pay higher interest rates, so if a broker can make a deal for you, it is worth doing.

As with any mortgage, you will need to show the lender your salary and income, your outgoings and how much deposit you have. Due to your bad credit, they may also ask for extra payslips and bank statements dating further back than if your credit was good. This will help them to build a better picture of your financial situation.

If you want to apply for a commercial mortgage with bad credit, you will have fewer options, higher interest rates and may need a larger deposit. Commercial lenders tend to be more flexible than regular mortgage lenders and will sometimes review offers on a case by case basis. Therefore, it is important that you can show your credentials as a business owner.

If you can, spend a few months sorting out your finances before applying. Your bad credit score can be improved with a few simple steps. This will give you much greater options when applying for commercial finance products.

Firstly and most importantly, you should ensure that all payments and repayments are made on time with no exception. You can begin to rebuild your credit score by trying to keep on top of payments. Secondly, try to save for a larger deposit.

Although both measures take time, they will make a big difference to your application. If you have a larger deposit, you are more likely to be accepted.

Always check your credit file so you can identify where the problems arise from. For example, if a credit card has outstanding payments, this will negatively affect your score. Identifying the problem will enable you to try and rectify the issues causing your credit to be poor; for example, clear the debt with the credit card.

If you find there are issues with mistakes or something on your credit file is not correct, you need to write to the company with whom you hold the card or account to try and solve the problem. If you are unable to do so satisfactorily, you can seek help from the Financial Ombudsman Service.

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How Can A Trustworthy Broker Help You Secure A Business Mortgage?

With so many different lenders on the market and each having its own set of criteria regarding bad credit commercial mortgage application, it can be difficult to know which one will best suit your business needs. Enlisting the help of a professional and trustworthy broker means you are more likely to find the right lender for your personal circumstances.

It can be harmful, particularly if you already have bad credit, to apply directly to a lender. This is because if you are refused an application, it will affect your credit score negatively. Each time you apply for something, the lender will check your credit score by doing a ‘hard search’, and any negative responses to loans will go against you, making it harder next time.

A broker will be able to give you mortgage advice and make sure that you are applying to a lender whose criteria you meet, reducing the possibility of being rejected. They can also make sure you are getting the best interest rates and deals and are sometimes able to negotiate these on your behalf.

Using a trustworthy broker is a real bonus if you find yourself with bad credit and looking for the best deal on a commercial mortgage. The only downside is that you will have to pay for the services of the broker and need to do your homework to find a reputable and trustworthy one.

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What Are “Non-Status” Commercial Mortgage Lenders?

A non-status mortgage is also known as a self-cert, self-status or self-declaration mortgage and can be useful for people who find it hard to prove to lenders that they have a steady income. For example, people who are self-employed or earn from rental income may not be able to guarantee their monthly income to meet the standards of the commercial mortgage high street lenders.

However, with a non-status mortgage application, things like bad credit rating are not necessarily looked at, making it a potentially easier application process. Lenders will have other criteria, such as how much the property is worth and use that as collateral.

Not all non-status lenders are regulated by the Financial Conduct Authority, and if you don’t keep up with repayments, the commercial property could be repossessed.

The interest rates and amount of deposit needed are almost certainly going to be higher with this type of mortgage, so if you have struggled with bad credit in the past, this is an option but should be seen as a last resort.


Contact Us Today For Expert Advice And To Discover Your Options

It can be daunting to try and secure your future investments when you have suffered bad credit in the past. However, if you arm yourself with the right advice and knowledge from experts, you can get a deal that is perfect for your individual needs. For more information and advice please click here. To see our other commercial finance services, please click here.

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What credit score is typically needed for a commercial loan?

A credit rating between 561 and 720 (Experian) is a low credit score, considered below the average needed to secure a mortgage. However, there is no official minimum credit score when applying for a loan with bad credit.

This is because there isn’t one single score that lenders use, so they check your score against their criteria. In addition, specialist lenders who accept bad credit may have different requirements, so check with the lender first.

Will putting down a large deposit overrule my bad credit score?

The deposit acts as security and means you will need to borrow less from the lender. Depending on the lender’s criteria, your bad credit may mean they request a larger deposit to offset any risk. If you can afford a larger deposit, it may overrule your poor credit score.

Is choosing a non-status commercial lender a good idea?

Non-status lenders will not ask for proof of income or look at your credit score. Instead, they will base their offer on other criteria, such as the value of the commercial property. If you have a bad credit score or find it difficult to convince the lender that you have a regular and stable income, for example, if you are self-employed, non-status commercial mortgages can be a solution.

However, you need to be aware that the finance will be secured against the commercial property, so keeping up with repayments is a must. You will also find that the Financial Conduct Authority does not regulate many non-status commercial lenders, so make sure you research before applying. This route should be a last resort.

How can I improve my business credit rating?

There are things you can do to improve your business credit rating. Firstly, always make sure you check your score with the Credit Reference Agencies, the three main ones in the UK are Experian, Equifax and TransUnion.

By regularly checking your score, you can make sure there are no mistakes that may affect your rating. It also allows you to see exactly where your issues lie and what is causing the negative rating.

Cancel and adequately close down any accounts that are no longer in use. Always submit accounts on time and make sure all payments are made on time, with no exception. Limit applications for loans or credit as they can negatively affect your score, particularly if you are turned down.

Make sure you look after your personal credit score as well as your business one, as lenders may consider both when you apply.

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