Does Finance for Property affect your business? Cash flow can become a problem for business owners of all types, regardless of their size or stage of development. In these instances, they may wish to raise additional funds, and raising capital against business assets is usually the most cost-effective way.
Business premises are the obvious choice against which to raise funds. Typical lenders are more likely to fund projects needing loans where ‘bricks and mortar’ collateral is offered against them. Both High Street Banks and other lenders have become increasingly keen over recent years to lend businesses capital against their property assets, and this has resulted in a competitive market.
Up to 70% of the premises value can usually be loaned, with some lenders offering more than this. As with any loan, forward planning is an absolute necessity, as the premises may be at risk if the repayments aren’t maintained at the agreed rate. The business must be able to incorporate the repayments into the day-to-day trading profits, and should err on the side of caution when planning, to include variances in either income or interest rates, although fixed rates are an option.
Business owners trading as a company who own the property, may wish to personally borrow the funds, with a view to renting the premises to the company. This rent may be of benefit to personal income, as well as being an expense against the company and therefore reducing the tax payable.
It may also be beneficial to transfer the property into a pension scheme (rules apply), whilst using the pension as an extremely tax-efficient way to collect rent from the company.
As with any mortgage, lenders require a ‘legal charge’ over the property in question. This gives them the right to repossess if repayments aren’t kept up to date.
Interest rates for finance for property vary depending on the business sector, the amount borrowed, the term of the loan, and the profit margins of the business. They are usually 2-6% above base rate. At the time of writing (2017), the base rate is currently 0.25%. There is usually an option to fix the rate of interest – this guarantees the monthly repayment but could be subject to an early repayment fee, or redemption fee, should the business be in a position to repay the loan before the agreed fixed rate ends. Sensible professional advice should be considered at all points to avoid any penalties or losses.
In addition to the repayment fees, there will be an arrangement fee to consider, which is usually 1-3% of the loan amount.
To raise the funds, the business owner will need to present their case in detail to the lender. An independent commercial finance broker is invaluable here. The lender will require detailed and up to date financial information on the business, alongside projections, and clarity of what the loan is to be used for and how long it will take to comfortably repay it.
If the property is to be rented on a commercial basis, the key thing from a financial perspective is to include contingency for empty periods (voids), and ongoing maintenance and repair of the property in question.
This commercial buy-to-let mortgage funding varies from the previous types of commercial mortgage funding we’ve mentioned – rates are usually higher as there is a higher risk to the lender. Most funders, as with buy-to-let residential properties, will offer an interest-only basis loan, with options to overpay capital at no additional cost. Usually the loan-to-value of this type of loan is 75%, but the key consideration from both sides will be the potential rate of income from the property, alongside the length of lease.
Funding for development is another type of property finance, that we get approached about on a regular basis. Funds may be needed to purchase the building land and/or fund the build costs of the development itself. This can range from individual residential building plots, to chunks of land with permission for numerous dwellings or extensive commercial units.
Development funding from High Street Banks has reduced considerably since the financial crash – it is considered high risk and therefore not an area that banks prioritise. Having said that, this has resulted in numerous specialist funders of this kind of loan springing up.
To be considered for Finance for Property to develop land, the developer needs to demonstrate extensive experience and success in their field. It’s imperative to show evidence of previous projects being completed on time and on budget. The loans are calculated against both the original land value, and the estimated final value of the site. This kind of loan tends to be short term, and more expensive than other kinds of lending, and may require additional security from the developer. Various additional factors are incorporated into this kind of application, not only experience, but the current market and buying trends in the area. Pre-selling of units, or selling off plan, is one common way that developers secure cash to get underway with the project, whilst also maintaining the confidence of their investors / lenders.
In any event, the presence of an experienced property lawyer will be intrinsic to the success or failure of any Finance for Property, and a good lawyer will lay out the present and future risks to allow for an informed decision to be made.
