By Gary Hemming CeMAP CeFA CeRGI CSP – Commercial Lending Director ay ABC Finance (www.abcfinance.co.uk)
In the wake of recent events, raising finance has again become a critical issue. In this guide, we will break down how your business premises can be used to raise finance, the benefits of doing so and the key considerations of doing so.
What funding can I use to raise money against my business premises?
When looking to raise funding against your business premises, a commercial mortgage or secured business loan is usually the most suitable option.
A commercial mortgage is simply a mortgage secured against commercial property, in this instance, your business premises.The term commercial can cover anything from retail shops and industrial units to hotels and agricultural farmland.
In the current climate, catering and hospitality businesses are likely to be able to borrow up to 65% of the value of the business.A good start- ing point is to speak to your business bank to see what they have to offer.You can also talk to a commercial mortgage broker who will be able to offer you a comparison, some brokers do charge fees so it’s worth asking about this upfront to reduce costs.
When searching for an appropriate lender you can look at both High Street banks and also challenger banks. High Street banks tend to offer the lowest interest rates but may not offer as large a loan as a challenger bank may therefore this needs to be taken into consideration.
The interest rate and maximum loan offered will depend on the type of property, whether you’ve been able to operate through the pandemic, the financial strength of the business and several other factors. Interest rates vary from around 2.5% – 4% with the High Street and from 3.5% – 7.5% from challenger banks. Commercial mortgages usually take 8 -12 weeks to complete therefore if funds are needed quickly, a secured busi- ness loan may be the answer.
Secured business loans, is a business loan which is usually secured against your business premises, or sometimes your home. As this type of loan is secured on property and less risk for the lender, you may be more likely to be approved than you would for an unsecured business loan.
What are the advantages and disadvantages of securing borrowing against my business premises?
There are 2 main advantages of using your business premises as security. Firstly, it means you may be able to borrow more and over a longer period than you would with an unsecured loan.
Also, as the lender has a property as security for the loan, they will be more flexible when looking at adverse credit and other problems.
The main disadvantage is that secured lending tends to take longer to complete than unsecured loans, meaning they may not be suitable for urgent requirements.
How has the pandemic affected lending in the catering and hospitality sectors?
When lending money, lenders always look at the borrower’s ability to repay the loan. Even if the loan is secured on property, they use their own affordability model to calculate how much somebody can borrow, regardless of the amount of equity in the property.
Due to the Covid-19 pandemic lenders are expressing caution when assessing new applications. As part of the application process, they may ask for details such as financial information for the past 12 months, a Covid impact form which details how Covid-19 has impacted your business and projections for the next 12 months.
If you think you may struggle to complete some of these documents, a good commercial mortgage broker may be able to help. Many brokers charge fees for their service, while others don’t.Where possible, a reputable fee-free broker is usually the best option. Some brokers charge upfront non-refundable fees, I would always recommend paying these out, even if they produce an agreement in principle.
What are the key considerations before I move forward?
If refinancing an existing debt you should take into account any fees involved and ensure it works out cheaper overall.
You should only consider raising finance for your business if you are confident it will help the business long term and you can afford to meet the repayments. It is worth discussing the proposal with your accountant before borrowing money. Of course, during these difficult times, there may be a necessity in the short-term.