Written ByKeith Steven
Managing Director
Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He is the managing director of KSA Group Ltd - a specialist firm of turnaround and licensed insolvency practitioners. Keith was nominated for Turnaround Practitioner of the Year 2014 at the National Insolvency and Rescue Awards in 2014.
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.
Duration
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.
Application process
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.
Cost
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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"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at help@ksagroup.co.uk
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