Rent or buy your business premises?

Renting is the sensible default for many businesses, and there is no shame in staying a tenant. It keeps your capital in the trading side of the business rather than tied up in bricks and mortar, which matters if you are growing quickly or your cash is better spent on stock, staff or equipment.

• Flexibility: when a lease ends you can move, expand or contract without having to sell a building first.
• Low upfront capital: a deposit and some fees, rather than a large lump sum tied into a property.
• Fewer responsibilities: depending on the lease, the landlord often carries structural repairs and some maintenance.

The trade-offs are real, though. Rent is money that leaves the business for good and builds no equity. Rent reviews can push your costs up at renewal, and unless you have a secure lease your tenure is never fully in your hands. A landlord may want the building back, or may sell it to someone with different plans.

Buying suits a business that knows where it wants to be for the long run. Instead of paying a landlord, your monthly payment goes towards a property the business owns outright at the end of the term.

• Control: you decide how the space is fitted out, altered and used, within planning and any lender conditions.
• Cost certainty: on a fixed rate you know your payment for a set period, rather than facing open-ended rent reviews.
• Building equity: each payment chips away at the loan, and over time you build a stake in an asset that may also rise in value.
• An asset on the balance sheet: owning your premises can strengthen how the business looks to future lenders and buyers.

Buying also has downsides worth facing squarely. It ties up a deposit that could be working elsewhere, it puts repairs, insurance and business rates squarely on you, and it makes moving harder because you have to sell before you can fully move on.

There is no universal answer, so it helps to work through a short checklist against your own situation:

• How settled are you? If you expect to be in the same area for many years, buying starts to make more sense.
• Is your trading steady? Reliable profits make a purchase easier to fund and easier to live with.
• What is the capital doing? Compare the return on money kept in the business against the cost of tying it up in a deposit.
• How much space do you need, and for how long? A building you will outgrow in two years is a poor purchase.
• Can you carry the running costs? Repairs, insurance and rates land on the owner, not a landlord.
• What does the lease alternative cost? Put likely rent, reviews and renewal terms next to a mortgage payment on the same building.

The businesses that get the most out of owning their premises are usually the ones that have found their feet. They have traded for a few years, their profits are steady rather than spiky, and they can see themselves operating from the same sort of space well into the future.

For a business like that, a purchase converts an ongoing cost into gradual ownership. The payment that used to disappear as rent now reduces a loan and builds a stake in the building. If the business later needs to raise money, an owned property can support a remortgage or further lending in a way a lease never can. A younger or fast-changing business is often better served by the flexibility of renting until the picture settles.

Most owner-occupiers buy with a business mortgage, where the building the business trades from is the security and the loan is repaid from trading profits. The underwriting looks hard at whether the business can comfortably afford the payments, which is a different question from a residential mortgage based on personal income.

As an indication, and always subject to status and valuation, terms in the current market tend to sit around these bands:

• Rates: from around 6%.
• Loan to value: typically 70% to 80% for strong trading businesses, so a deposit from around 20% to 30%.
• Term: commonly 5 to 25 years.
• Arrangement fee: usually 1% to 2% of the loan.

Where a purchase needs to complete quickly, or the property is not yet in a lettable or usable state, short-term bridging finance is sometimes used, at around 0.75% to 1.1% per month, before moving onto a longer-term mortgage. These figures are indicative only.

The cleanest way to decide is to build a simple side-by-side comparison for the actual building you have in mind. On one side, put the realistic cost of renting it, including likely rent reviews. On the other, put the deposit, the monthly mortgage payment, and the running costs an owner carries. Then look at what the business owns at the end of each path.

Because the mortgage side depends on how your accounts read to a lender, it pays to understand affordability early rather than after you have found a property. We are happy to look at the numbers with you and give an honest view of what is likely to be workable, without any obligation. As a finance arranger and introducer, our role is to help you fund the right decision, not to tell you whether to rent or buy.