Using Commercial Property to Raise Capital for Business Investment

The Client Situation

A profitable manufacturing company wants to install a new production line and acquire a smaller competitor. Its directors are reluctant to dilute ownership or remove more cash from reserves. A separate property company owns the factory occupied by the manufacturer. The building is worth materially more than the existing mortgage balance.

From the accountant’s perspective, the group appears asset rich and the investment case may be persuasive. Yet the proposed borrower, security owner and recipient of the funds are not necessarily the same company. The factory may be owner occupied in economic terms but legally held as an investment. Existing rent, intercompany agreements, guarantees, debentures and bank covenants can all affect the available route.

The first task is therefore not to calculate a percentage of the property value. It is to map the transaction: who owns the property, who trades from it, who needs the capital, what the money will achieve, how the new debt is serviced and what happens if the investment underperforms.

Owner-Occupied and Investment Property Are Different Credit Cases

Owner-occupied commercial property

The borrower or a connected trading business uses the premises for its own operations. Examples include a dentist owning the surgery, an engineering company occupying its factory or a retailer owning its shop. The lender normally considers the property as security but relies substantially on business performance to service the debt.

Accounts, management figures, EBITDA adjustments, existing commitments, cash conversion, customer concentration and the post-investment forecast can matter. The lender may also ask whether the property is specialised. A purpose-built site can be valuable to the client yet have a narrower resale market than a standard industrial unit.

Commercial investment property

The property is let to an arm’s-length tenant and the borrowing is supported principally by contracted rent. The lender examines the lease term, break clauses, rent review, repairing obligations, arrears, tenant covenant, occupancy history and re-letting prospects. It will still consider the borrower and wider portfolio, but the asset’s standalone income is central.

Connected-party occupation

A property company may own the premises and lease it to a trading company controlled by the same people. The lease can provide useful separation, but a lender will not necessarily treat the rent like income from an independent blue-chip tenant. It may underwrite the operating business, the property company and the group together.

What Business Investment Might the Capital Fund?

Commercial-property borrowing may be considered for a broad range of lawful business purposes, but lender policy varies. The purpose should be specific, evidenced and proportionate. It may include:

• machinery, vehicles or technology;
• fit-out or energy-efficiency works;
• purchase of another trading site;
• an acquisition or management buyout contribution;
• recruitment and expansion into a new market;
• refinancing expensive short-term or unsecured debt;
• working capital connected with a defined growth programme; or
• acquiring another income-producing property.

“General business purposes” is rarely as persuasive as a costed investment plan. The lender may want quotations, contracts, completion statements, forecasts or a schedule showing how the money will be deployed. If part of the facility refinances debt and part funds investment, both uses should be separated.

The accountant can test whether the return expected from the investment comfortably exceeds the complete financing cost. That calculation should include arrangement fees, valuation and legal costs, possible early-repayment charges, interest during implementation and a contingency for delay.

Routes Worth Comparing

Current lender publications illustrate the breadth rather than a universal rule. Aldermore publishes commercial facilities from £500,000 to £3 million, terms from two to 20 years and multiple repayment bases across commercial, semi-commercial, industrial, office and retail property. Shawbrook publishes commercial and owner-occupied products and expressly refers to refinancing for business expansion. Every case remains subject to current criteria, valuation and underwriting.

What a Commercial Lender Is Likely to Examine

1. Property value and marketability

The lender instructs its own valuation. Market value, vacant-possession value, alternative use, condition, environmental issues, EPC, tenure and location can affect appetite. The accountant’s balance-sheet figure or an estate agent’s opinion is not the lending valuation.

2. Loan-to-value

LTV is a ceiling, not an entitlement. The supported loan may be lower once debt-service cover, property type or lender concentration is considered. Aldermore’s current public page advertises a maximum 75% LTV across its wider commercial range, while its detailed product guide differentiates limits by property and repayment type. This is why a headline maximum should never be used as the client’s forecast.

3. Debt service

For an owner occupier, the lender may test EBITDA or adjusted business cash flow against interest and capital payments. For an investment, it may stress the rent against mortgage payments. Published Aldermore criteria, for example, distinguish commercial investment from owner-occupied debt-service tests. The exact calculation, stress rate and permitted adjustments vary by lender.

4. Historic performance and forecast credibility

Two or three years of accounts may show resilience, but recent management figures can reveal current direction. Forecasts should state assumptions for sales, margin, recruitment, costs, implementation and debt service. A forecast created solely to reach the lender’s required coverage is less credible than one tied to a board-approved investment plan.

5. Lease and tenant covenant

For investment property, a strong tenant and long, unbroken lease may improve certainty. A short lease, break clause, arrears, concentrated tenant exposure or unusual property can reduce available leverage. The lender may examine the tenant’s accounts and the relationship between passing rent and market rent.

6. Borrower and group

The lender wants the ownership chart, directors, shareholders, connected businesses, existing debt and relevant experience. Offshore ownership, trusts, pension structures or several related companies can narrow the lender pool and increase legal work without automatically preventing finance.

7. Security and guarantees

A first legal charge is common. A lender may also require a debenture, personal guarantees, cross-guarantees, subordination of director loans or restrictions on distributions and further borrowing. Published Aldermore criteria currently refer to a debenture, a personal guarantee capped at 20% of the loan and possible cross-guarantees; Shawbrook publishes a minimum personal guarantee on its commercial range. These are lender examples, not market-wide promises.

8. Purpose and repayment strategy

The lender needs to understand where the money goes and why the debt remains serviceable afterwards. A term loan may amortise from trading cash flow or rent. An interest-only structure needs a credible ultimate repayment route. A bridge requires a timed, evidenced exit and a fallback.

Property Ownership and the Movement of Funds

The entity that owns the property may borrow, while another group company needs the investment. That can create an intercompany loan, capital contribution, distribution or other transaction. The funding route should not be improvised after completion.

The accountant should consider tax, distributable reserves, transfer pricing where relevant, director-loan implications, balance-sheet presentation and the effect on group cash flow. The solicitor should document the facility, security and movement of funds, advise on corporate benefit and complete any required board or shareholder approvals.

The lender must know the intended recipient and use. Concealing a connected-party transfer can breach representations or permitted-purpose clauses. Conversely, a transparent group map and properly documented intercompany arrangement can help the underwriter understand why the property company incurs debt and how it will be serviced.

What the Accountant May Need to Provide

A concise accountant’s note can add considerable value when it explains how the numbers relate across entities. It should confirm facts and assumptions, not promise future performance or state that a lender will accept an adjustment.

An Illustrative £550,000 Business-Investment Raise

A family group owns a well-located industrial property in a property company. It is let on a documented basis to an established third-party occupier under a recently extended lease. The property has conservative existing leverage and consistent rent. The shareholders want £550,000 to acquire a second commercial asset and diversify group income.

A straight percentage-of-value approach suggests sufficient equity, but the adviser tests the complete case. The valuation must support both market and rental assumptions. The lender examines the tenant covenant, lease term, interest cover, ownership, borrower experience and intended acquisition. The client also wants to limit personal exposure.

The accountant supplies the company accounts, rent record, ownership map and forecast showing the existing asset can service the debt without relying on income from the proposed purchase. The solicitor confirms the corporate structure and security. Willow presents the long lease, stronger contracted rent and conservative leverage as the central credit strengths.

A £550,000 facility is arranged against the commercial property with repayment flexibility and without a full personal guarantee. Capital can then be deployed into the second acquisition. Importantly, the first asset supports the debt on its own evidence; the new investment is not asked to rescue an otherwise unaffordable facility.

This illustration follows a published Willow outcome, but it is not a prediction. A different tenant, lease, building, borrower or lender market could produce different terms.

Where Finance Planning and Accounting Advice Meet

The accountant assesses the proposed investment, working-capital requirement, tax treatment, group cash flow and route by which funds move between companies. They can explain accounts, normalise genuine exceptional items and challenge forecasts.

Willow assesses the commercial property, lender market, debt service, leverage, term, repayment profile, security and guarantees. It packages the case and advises on the finance route.

The solicitor advises on title, charges, debentures, guarantees, priorities, corporate benefit and intercompany documents. The valuer gives the lender an independent view of property value, rent and marketability.

These roles should meet before the application. Tax-efficient ownership may still be difficult to finance; a financeable structure may create tax or legal consequences. Neither discipline should be treated as the final-stage checker of a decision already made.

Common Mistakes to Avoid

• Multiplying value by a headline LTV: debt service may be the binding constraint.
• Calling connected rent independent: the lender may underwrite the trading group.
• Using stale accounts alone: current performance can change the case.
• Leaving the purpose vague: a costed business plan is easier to assess.
• Ignoring guarantees and debentures: commercial risk extends beyond the monthly payment.
• Overlooking existing bank covenants: new security or debt may require consent.
• Moving money after completion without documentation: purpose and corporate benefit must be clear.
• Using a bridge for permanent capital: a weak exit can turn speed into risk.
• Assuming the new investment will service the loan immediately: implementation may take longer than forecast.
• Borrowing to the maximum: preserve a buffer for rates, vacancy and trading volatility.

When to Involve Willow

Bring the finance discussion forward where:

• commercial property contains equity but the operating company needs liquidity;
• the property owner and cash recipient are different entities;
• the premises are occupied by a connected company;
• the client is deciding between property debt and extracting company funds;
• an acquisition, equipment order or lease event creates a deadline;
• accounts are historic but management figures show change;
• the property has a specialist use or mixed occupation;
• the client wants interest-only or limited personal guarantees;
• existing charges, debentures or director loans may affect security; or
• the proposed investment depends on a particular net capital figure.

An anonymous initial outline can include property type and use, estimated value, debt, rent or EBITDA, ownership, requested net capital, purpose, timing and proposed repayment. Client identification and sensitive documents are not needed for the first discussion.

Relevant Willow Case Evidence

For the wider liquidity decision, see raising capital against property without selling and when property finance should enter a £500,000 liquidity discussion.