Secured commercial funding for start-up businesses
One of the biggest hurdles for a fledgling business is raising the required capital. The traditional small business loan can be expensive and inflexible, and even with the Funding for Lending Scheme (FLS) helping to coax high-street banks into granting more loans to SMEs, it remains notoriously tricky to get an application approved.
The commercial finance market has ballooned in the years since the financial crisis. The bridging loan market in particular has gone from strength to strength, as short-term lenders have been able to fill the rift left by mainstream lenders reluctant to expose themselves to post-crunch risk.
With new entrants into the market jostling for business, products invariably become more competitive in terms of cost and flexibility. Products have even homogenised to a degree, with specialist buy-to-let and commercial lenders offering short-term options and bridge-to-let loans allowing borrowers to ‘term out’ to longer-term finance once the loan comes to an end.
Here we will take a broad look at these two types of commercial funding.
Bridging loans are so named for their ability to bridge the gap between a debt becoming due and credit becoming available, and can be turned around within a matter of days. The funds can also be raised for any legal purpose, meaning that anyone who can offer suitable security for a loan can use one to get cash fast.
This makes bridging loans extraordinarily versatile; they can be used to circumvent property chains, expand business premises, purchase additional stock, convert or renovate property, plug cashflow gaps and take advantage of short-lived investment opportunities such as auction purchases. Terms can be as little as one day, and it is possible to find bridging loans with no early repayment charges from which you can make a quick exit with no additional cost.
A bridging loan is either ‘open’ or ‘closed’. This refers to whether or not the loan has a fixed end date and exit strategy (such as further credit or the sale of the asset) in place. Whilst open loans – those without a fixed end date – are riskier and, as a result, more expensive, rates for either option are far cheaper than they were pre-crunch, ranging from around 0.65% to 1.50% per month.
Although not every bridging lender will fund every type of deal, across the entire market it is possible to secure funding against almost any kind of property, including undeveloped or agricultural land, uninhabitable property, non-standard construction and commercial or semi-commercial property. The funding can be secured as a first charge – meaning the lender has first or sole priority for repossession if you default on your debts – or second or subsequent charge.
It is also possible to secure a bridging loan against more than one property; indeed, by offering additional security, you can increase the LTV (loan-to-value) ratio of the loan to 100% or even higher, removing the need for a cash deposit.
Most bridging loans are not regulated by the Financial Conduct Authority (FCA). However, if 40% or more of the property is intended for occupation by the borrower or borrower’s family, this will be classed as a residential bridging loan and will therefore be regulated.
Commercial mortgages are intended to finance the purchase of commercial or semi-commercial property, with loan terms lasting from 3 years to 30. Commercial mortgages can be used to fund up to 75% of a property purchase but, like bridging loans, it is possible to increase this figure by offering additional security.
Many commercial mortgage borrowers are looking to rent out their property to commercial tenants, rather than run the business themselves. In these cases, most lenders insist that the rent charged covers the interest repayments by a minimum of 125%. Either way, it may well be a requirement that you have some hands-on knowledge or experience in the industry you are targeting.
Commercial loans are extremely flexible and tailored to the borrower. It is not uncommon for customers to finance entire property portfolios, worth millions, with a single commercial mortgage. Mortgages are underwritten on the basis of both the strength of the borrower and the viability of the asset; in short, lenders are not always beholden to rigid criteria.
Like bridging loans, the FCA does not regulate most commercial mortgages.
Bridging loans are short-term loans, rarely lasting longer than 18 months. Commercial mortgages typically last for a minimum of 3–5 years, and as long as 30.
More information is usually required for a commercial mortgage application than for a bridging loan application. A lender will request borrower credentials – income and expenditure, assets and liabilities, proof of income, tax returns, company management accounts and a summary of the borrower’s relevant experience – as well as details of the property or properties to be mortgaged. Bridging loans generally require just an application form from the applicant and a valuation of the property, meaning the process is far quicker.
Whether or not the interest charged on a bridging loan will be higher or lower than a commercial mortgage will depend entirely upon the individual circumstances of the borrower and the nature of their application. Commercial loans do tend to have lower interest rates; however, because the loan terms can be significantly longer, it is likely that you will still pay more interest in the long run.
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Written by Ben Gosling for Commercial Trust, a dedicated broker for bridging loans, buy-to-let mortgages and commercial mortgages. For more information visit www.commercialtrust.co.uk.
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.