From Buy-to-Let landlords through to expanding leisure and retail brands, with commercial loan arrangements as part of your service offering, your brokerage firm becomes instantly better equipped to meet the needs of a wide range of businesses.
But do you know what type of client might be eligible for development finance? And do you know if your client has considered a bridging loan to more traditional funding routes?
Here’s a closer look at some of the main commercial borrowing vehicles, alongside an explanation of how and when they are most likely to meet the needs of your clients.
Why you should expand your commercial loan offerings
They take a range of different forms, but most commercial borrowing solutions tend to have certain features in common:
- Security: these are always secured assets as opposed to unsecured loans, with the property that is the subject of the loan used as collateral. In some circumstances (e.g. where the company wants to develop a property for a specialist industrial use), the lender may also require additional security in the form of a floating charge or debenture and personal guarantees from Directors if lending to a company. This means that other company assets, like retail stock or machinery, are listed as collateral for the loan.
- Application procedure: no two businesses are the same, and compared to residential borrowing, commercial lenders tend to have fewer ‘set-in-stone’ rules for eligibility and approval. Instead, the decision-making process is much more focused on the risk profile of the business applying for the loan.
For a broker, all of this raises a number of opportunities:
- Providing a high-value service: the pricing for commercial mortgage and other lending services tends to be higher than for residential, precisely because of the level of perceived risk to the lender. This is high-value and potentially lucrative work, which can be just the ticket for boosting your firm’s fee earnings.
- Building a niche offering: once you’ve started to build up your commercial offerings, there’s the added potential to target-market your services to particular niches that may be under-served where you are based. Examples might include retail, buy-to-let or student accommodation/serviced office accommodation developers.
- Diversification: adding a commercial loans arm to your firm can help minimise your business risks — particularly if the residential market hits a slow patch (something that might be particularly useful if uncertainty over Brexit increases).
Commercial Loan types
Now we’ve gone through reasons for expanding your commercial loan offerings, let’s take a closer look at some of the main categories of lending arrangement.
From landlords adding to their portfolio, property developers, through to businesses looking to expand their property footprint, a commercial mortgage can meet a wide range of needs. A strong commercial mortgage offering can therefore form the bedrock of your commercial client service.
In many respects, a commercial mortgage mirrors its residential equivalent. The minimum that can be borrowed is typically low (£50,000), and repayment can be up to 25 years. The big difference is in relation to the size of the market. Unlike residential mortgages where a single lender’s website might have pages and pages of deals for residential borrowers on display, your clients are likely to find access to commercial mortgage products very restricted.
Access to mortgage finance is frequently cited as one of the biggest barriers facing UK businesses. So this is another opportunity for you to add value; by helping your clients unlock the best products on the market.
Second Charge mortgages
You are approached by a client who has an existing commercial mortgage arrangement. They want to unlock some of that equity, perhaps to fund an additional Buy-to-Let purchase or to finance an extension on their current warehouse.
Remortgaging for an increased amount of capital may seem like the obvious way forward. But this isn’t always practical (e.g. if the business is going to be hit by a high early repayment penalty, if they want to stick with their current fixed-rate arrangement — or if recent issues with their credit record means that they will have problems with meeting their current lender’s eligibility criteria).
Where remortgaging isn’t practical, a Second Charge mortgage provides an alternative way forward. This is a further secured loan, with the property as security — and it basically sits on top of the existing mortgage. Just like a standard commercial mortgage, your client can opt for a repayment or interest-only arrangement at fixed or variable rates. It’s an excellent go-to solution to have at your disposal where a client is unable or unwilling to remortgage.
This offering is designed to help property professionals finance structured development projects. You should also be aware that development finance isn’t just for major housebuilders (the minimum development finance loan amount available through Enterprise Finance, for instance, is just £150,000). Self-build projects and relatively small-scale buy-to-let landlords looking to convert and renovate a property can benefit from this type of finance, too.
By offering development finance, you have a prime opportunity to demonstrate sector-specific expertise. High street banks can be extremely reluctant to agree on terms for this type of finance, especially if it’s a complex project, or if the applicant is a new entrant to the market.
By contrast, specialist development finance providers are much more willing to consider applications on their own merits. If the project seems viable, there’s a good chance that your client will get a rapid, positive decision (in stark contrast to what they may have previously experienced on the high street).
Development finance is designed to take account of the end product that will be produced through the development, and lenders base their decision on the value of the asset that will delivered at the end of the project.
Bridging loans started life as a means of helping clients in ‘broken chain’ scenarios: if the sale of their property is delayed and a separate transaction depends on the release of equity from that sale, this type of short-term financing offers a temporary fix. Under this scenario, the loan is repaid once the sale is complete and the funds eventually come through.
That said, this type of secured, short term interest-only loan can provide a rapid short-term funding solution in a wide range of scenarios. Examples include meeting a deposit payment obligation following an auction purchase, or even funding a purchase, along with essential refurbishments so that the spec of the property meets the conditions required by mortgage lenders for longer-term financing.
Does your client have an exit strategy? This is the all-important question to ask when considering whether bridging finance is appropriate. If there is a sale or refinancing agreement provisionally agreed, or if cash is about to be released from another source, then bridging finance offers a swift, convenient and valuable financing option. If not, then look at alternative models (development finance, for instance).
If you’re ready to start putting together your own commercial loans service offering, or just learning more about how to make the most out of your property opportunities, head over to our blog or speak to Enterprise Finance today.