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Commercial funding - how much can I borrow?

Most forms of commercial funding are not regulated by the Financial Conduct Authority (FCA), who insists that regulated products are strictly underwritten on the basis of income and affordability. This means that, as someone borrowing capital to fund the purchase of commercial premises, you can often borrow more than you could for a residential mortgage.

This is not to say that your funding application will be a simple box-check! Your commercial mortgage or bridging lender will require you to evidence your business accounts, credit history, assets and liabilities, income and expenditure and relevant sector experience, among other things.

The distinction is that how much you can borrow is not usually determined by your own earnings, but by the earning potential of the property you hope to finance.

Debt-service coverage ratio (DSCR)

This brings us to the first factor that will determine how much you can borrow: debt coverage.
Debt-service coverage ratio, or DSCR, is a term used in corporate and commercial finance to determine whether a business’s cash flow can cover its debt repayments.

Commercial lenders in the UK typically use the potential rental income of a property to calculate DSCR. The lender will determine this by arranging a rental valuation. Hence, a far more common term for DSCR in this industry is ‘rental cover’.

By how much your potential income will need to cover your repayments varies depending on the type of property, your intentions for it, and, indeed, the lender’s own criteria. A high-street lender might require rental coverage as high as 190% for commercial properties, and 130% for buy-to-let properties; however, there are lenders who accept lower figures (between 110 and 125%). Working with a specialist broker will give you access to a wide range of options when it comes to lender criteria.

Furthermore, the interest rate used to calculate the debt won’t always be the rate of the product you are applying for. Often, it will be a nominal rate that is in excess of this.

Example: You are taking out a commercial mortgage worth £1.5 million. Rental cover is set at 125%, and even though the interest rate is only 5.75%, the lender uses a ‘stress rate’ of 6.5% in its calculations.

At this rate, your monthly interest repayments would be £8,125, meaning the monthly rent would need to be at least £10,156.25 in order for your lender to agree to the mortgage:

- 1,500,000 × 0.065 = 97,500
- 97,500 ÷ 12 = 8,125
- 8,125 × 1.25 = 10,156.25

DSCR if you are an owner-occupier

If you are buying a property to run a business from yourself, rather than rent out, then a lender will usually work out the debt cover using your ‘adjusted net profit’. This is your net profit with a number of costs added back into it, such as amortisation, depreciation, interest and taxes. Adjusted net profit is used as a broad indicator of a company’s profitability and ability to service debt.
Loan-to-value (LTV) ratio

The other factor that determines how much you can borrow is the value of your commercial property. The loan principal over the asset value gives the loan-to-value, or LTV, ratio.

LTV is capped so that you don’t have too high a debt secured against your property. This limits your lender’s risk, as they are more likely to recoup the full cost of the loan if they need to repossess and sell your property.

Usually, you cannot borrow more than 75% of the property value; however, by offering additional security or borrowing against the market value rather than the purchase cost, you can borrow in excess of this amount.

Increasing your LTV beyond 75%

The simplest way to increase your LTV above 75% is to offer additional security for the loan. This will usually take the form of equity in other commercial properties that you own. By doing this, it is possible to borrow 100% or more of the property value, abrogating the need for a deposit.

If you can’t or don’t want to offer additional loan security, you may also have the option of finding a lender who will lend against the market value or the property, rather than the purchase cost.

The market value refers to the best price you can expect from an independent transaction, assuming that you will have had enough time to market the property and prepare it for a sale. A market value can either be unrestricted or restricted to a predefined time period, such as 90 or 180 days.

Both restricted and unrestricted market values tend to be higher than the purchase price, particularly where the property requires some refurbishment. As such, you are more likely to find a lender willing to lend against a property’s market value if you are applying for a refurbishment mortgage or bridging loan.

For help determining the best finance product and investment strategy, always be sure to speak to a professional commercial finance advisor.

This article was written by Ben Gosling, a copywriter for specialist bridging, buy-to-let and commercial mortgage broker Commercial Trust.

Your property may be repossessed if you do not keep up repayments on any debt secured against it.
The FCA does not regulate some forms of commercial mortgage and bridging loan.
Commercial Trust charges a £995 fee for its buy-to-let mortgage service and the greater of £995 or 1% of the loan value for its bridging loan and commercial mortgage service. This fee is payable only on completion.

Rent quarter day: 29th September

As rent quarter day looms, it can be a tough time for retailers if cashflow is already tight. It may be worth negotiating with landlords to allow monthly payments (albeit with a small penalty) if the business is struggling already. 

Rent costs can be very high for retailers as the location has to be a good spot to bring in customers. Asking for a rent concession may be worthwhile if you can provide accounts and proof of the business's financial problems. Obviously, landlords don't want empty shops (especially if they own a shopping centre, for example) so they may be open to suggestions. 

If rent bills are too high, you may be able to vacate store premises if the company goes into a company voluntary arrangement (CVA). A restructure could save your business. Take a look at our retailer rescue page for more information. 

Increase in insolvent IT firms

According to the Exaro Insolvency Index published last week, the number of small IT firms becoming insolvent is on the rise.
There has been an increase of 36.2% insolvent companies within the IT sector since the same period last year. 203 small IT firms have so far become insolvent this year in Q3.

Despite the bad news, the sector in general is at its strongest since the recession.   

Small firms that are struggling with cashflow should look to possible rescue options like a Time to Pay deal or Company Voluntary Arrangement. If the firm is facing legal action, administration may be more appropriate, however it’s always best to seek legal and insolvency advice. 

Eco City Shares Suspended Pending Likely Administration

Shares in Eco City Vehicles were suspended yesterday as the firm teetered on the brink of collapse.   The shares in the firm set up by ex cabbie Peter Dacosta has seen its share price fall 80% in 2014. 

With no more Vitos being built due to  a lack of sales led to a pile-up of stock, Eco City admitted One80 cannot survive because of a “lack of production revenues” as well as an impending legal case against its 76.6% subsidiary by one of its licence holders.

In addition the firm One80 that adapts the Mercedes Vito Vans to comply with the strict turning circle rules went into administration.  So the future looks pretty bleak for the firm.  Eco City looks set to follow its rival TX4-designer Manganese which went into administration in 2012.   Since Manganese Bronze went into administration the Chinese have restarted production.  

Another pressue on the traditional cab car has been the rise of Uber which has allowed other taxi drivers to pick people up off the street like a metered cab.  Eco City is also facing competition from  Metrocab which is making an electric vehicle.

If it does go into administration they will try and sell the business to effect a rescue  or all the remaining assets and intellectual property will be sold to try and recoup monies for any creditors.  Shareholders will receive little if anything as they are the last in the priority list to get paid.

For more information on administration see this page.

Fall in insolvencies in Scotland

The insolvency rate of companies in Scotland has fallen in August which is the first month that there has been a year on year monthly fall.  This is likely to be because of the very high levels of HMRC winding up petitions that were issued in August 2013.  

Results from Exaro Insolvency Index (as pictured above) show a significant decline in formal insolvencies.

Interestingly, even with August's year on year fall, there has been an increase of 37.9% in 2014 overall. There were 936 corporate insolvencies in 2013 (up to August) compared with 1,291 insolvencies this year so far. 

If Scotland becomes independent (voting today!), will there be a rise or fall in future insolvencies? It's difficult to tell but it's inevitably going to affect figures either way. 

Inflation falls to lowest levels since 2008

The level of inflation has fallen to 1.5% which is the lowest level for many years.  This has been due to falling food and petrol prices.  Clothing, transport and Alcohol has gone up but not enough to offset the drop.  Falling world oil prices and aggressive price wars in the supermarkets may yet have further to go.   It means the Bank of England is under even less pressure to raise interest rates in order to keep CPI inflation at or below its target rate of 2%. Retail Price Index (RPI) inflation also saw a reduction, to 2.4%, from 2.5% the previous month.

The outlook is uncertain for many reasons.  Currency risks due to the possibility of an independent or even heavily devolved Scotland are worrying the exchange rate markets to a degree but this is likely to be determined on Thursday.  

The Inflation is still above average earnings growth which is running at 0.6% so politically the cost of living and affordability is still very much in the forefront of peoples minds.

Insolvency Series: Option 6 - Compulsory Liquidation

Usually considered as the very last resort for companies, compulsory liquidation is overseen by the Official Receiver (who is appointed by the court). Visit our page on compulsory liquidation for more information.

Rise in restaurant insolvencies

Latest figures from accountancy firm, Moore Stephens, reveals the number of restaurants entering insolvency has increased 15% year on year. 

747 restaurants entered either a CVA, administration or liquidation from June 2013 to June 2014, compared to 648 the year before. 

Despite overall insolvency levels falling, the restaurant sector stands out as one area that is facing particular financial distress. 

A reason for this rise could be due to the very bad weather and flooding we saw over the winter – customers would understandably be put off going out for dinner if it’s difficult to get to the restaurant because roads were blocked off by storms and flooding. Together with a rise in electricity and gas charges, it’s hardly surprising restaurant businesses have been hit.   

In addition, with many consumers adjusting their spending habits to save for essential costs, restaurant trips are usually ticked off as luxury expenses, therefore less people are budgeting to go out for dinner. 

Insolvency Series: Option 5 - Creditors Voluntary Liquidation (CVL)

This week, we take a look at one of the last options for struggling companies: creditors voluntary liquidation (CVL).

If your company has severe financial issues or is no longer viable, it's worth considering a CVL as it can be a quick and efficient way to wind down the business. A CVL often puts an end to months of worry and stress. For information on this insolvency procedure, visit our liquidation page. 

Opening of New Office in Manchester City Centre

We have opened a new office in Manchester to assist distressed businesses in the North West of England. With offices in London, Edinburgh, Birmingham, Gateshead and Berwick Upon Tweed and now Manchester, KSA Group is continuing to expand across the UK. The new office, set in the heart of the city of Manchester, is a welcome addition. 

With the new location in one of the UK's largest cities, we also have a new Regional Manager, Amanda Eckersley.  Amanda has worked in insolvency for ten years, covering the full spectrum, including Bankruptcy, IVAs, Compulsory Liquidations, MVLs and Administrations. By joining KSA she can now focus on assisting businesses in and around the City, Greater Manchester and the surrounding areas.

Amanda commented, I am very excited to have the opportunity to work within the KSA group at the new Manchester office.

We are now able to service clients right across the North West, who will now be able to benefit from the groups highly professional and commercial approach.

Visit Amanda at KSA Group Limited, Chancery Place, 50 Brown Street, Manchester, M2 2JG.

Managing Director, Keith Steven, said “I am delighted to welcome Amanda to our growing KSA team with her deep experience in insolvency and asset based lending. I am sure that she will be a valuable new team member and that she will help many North West businesses.

The opening of our new Manchester office marks the next stage in KSA Group’s growth and ‘plugs a gap’. We now have very experienced Regional Managers in every main business area delivering innovative turnaround solutions.”

Amanda can be contacted on 07841 338302 or 0161 956 8671  Of course, you can always drop an email to her on Amandae@ksagroup.co.uk

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