Exactly how much you can borrow for a business property depends on two factors.
1. How easily can you meet the repayment obligation every month?
Lenders want some certainty that you pay the repayment and interest every month. In order to make a risk assessment, they calculate Your annual free cash flows in comparison to the annual payment obligation of the business hyoptheek. That ratio is called DSCR (Debt Service Coverage Ratio). If the annual interest and repayment obligation is € 50,000 and the available cash flows are € 60,000, the DSCR is 1.2.
2. How stable is the business premises?
If you are no longer able to meet the payment obligations structurally, for example in the event of bankruptcy, the lender can collect and sell the property. They use the proceeds to pay off the outstanding mortgage amount. Business premises are generally less stable in value than houses, which means that you cannot borrow the entire value of the property for a business premises. Real estate financiers can finance 70% - 80% of the value of a business property. That percentage is called Loan to Value (LTV).
Repayment Obligation and DSCR
Real estate financiers use the DSCR to make a risk assessment of the mortgage application. A low DSCR (around 1.0x) means that your company's free flow of money is only just enough to bear the monthly mortgage payment.
Most real estate financiers have a minimum of 1.00x - 1.20x DSCR.
Typically, DSCR requirements are higher for riskier real estate, such as hotels, because their income is highly dependent on competition, seasonality and other economic trends.
The better Your free cash flow is compared to the mortgage obligation (DSCR), the better interest and conditions you will get with Your business mortgage application.
DSCR vs. Loan-to-value
In addition to DSCR, the loan-to-value (LTV) is one of the most important ratios during the Your business mortgage application process.
The two have a strong connection. In some cases, the mortgage application has an acceptable LTV (e.g. 75%), but the DSCR does not come close to the lender's criteria. In that case, the loan amount must be reduced so that the mortgage comes within the repayment criteria. This can be done either by bringing in more of your own money, or by purchasing a cheaper property.
Anyway, how much can you borrow for Your business premises?
Your interest and repayment obligation may not exceed Your company's free cash flow (DSCR> 1.00x). Want to know which loan amount fits the monthly costs? Calculate it with our calculator .
In addition, the mortgage can amount to a maximum of 80% of the value of the property (LTV <80%).
Example DSCR - minimum 1.00x
A company has an annual free flow of money of € 40,000. The annual interest and repayment obligation of the mortgage may therefore be a maximum of € 40,000 per year (€ 3,750 per month).
A quick calculation with our business mortgage calculator shows that with a monthly repayment of € 3,750, you can get a maximum mortgage of € 595,000
Example LTV - maximum 80%
An entrepreneur has an eye on a property worth € 500,000. With a maximum LTV of 80%, he can borrow a maximum of € 400,000. An own contribution of € 100,000 is required.
With a loan amount of € 400,000, the monthly interest and repayment obligation is € 2,530.60 (or € 30,367 on an annual basis). The entrepreneur can bear the mortgage burden well with his free flow of money. The DSCR is namely 1.32.