Getting the right commercial loans

Whether you are a sole trader or operate a limited company, there is a massive range of business and commercial loans available. Options include mortgages for buying or refinancing property, as well as unsecured loans or loans related to the business turnover and activity. With so many variations of commercial loans available it really makes sense to talk to an expert at the outset. You can then quickly find out the options and whether you, or your business, are eligible.

Below is a summary of some of the main commercial loans available but this list by no means covers all of the options.

Follow the links for more detail on the product you need

Commercial loans secured on bricks and mortar

A loan can be granted when the company offers property it owns as security. For example the commercial property it trades from. The fact the lender has security generally means it will be more generous in the rates it offers. It may also consider lending when unsecured lenders would not.

Essentially this is a commercial mortgage. The property does not always need to be owned by the company. It can also be owned in the name of the business owner. For example a “buy to let” investment property or their main home. The property could even be owned by a different company or individual and rented to a separate business.

Business / commercial loans secured on your home

If a business owner is taking out a loan personally secured on his or her main residence it is likely to be a regulated loan under the rules of the Financial Conduct Authority (FCA). The FCA seeks to protect consumers. Amongst other things by applying more rigorous affordability checks and an advised sales process. If also imposes high standards of ethical lending on both lenders and brokers it regulates.

Examples of lending could include a personal mortgage or secured loan for business purposes secured on the business owners home.

This may not suit some business owners due to the more rigorous checks carried out on regulated loans and mortgages. However, borrowing in the name of the business may open up more suitable options.

Mortgages to buy a home with a commercial element

This is a tricky area which is not well catered for by lenders. Many borrowers fall between the gaps left by residential lenders and commercial lenders. Consequently they are not catered for or are left with very restricted choice.

Most residential mortgage lenders prefer not to lend where there is a commercial element to the property. Assuming the residential part of the property you will live in makes up at least 40% of the total, it will be a regulated loan with a restricted choice of lenders. Serviceability for the loan will be assessed on the borrowers current taxable income. Lenders are less likely to be interested in the income which may be generated from the commercial element. Some lenders do try to accommodate these scenarios. However, they usually disregard any value or income attached to the commercial element. This can leave borrowers needing larger deposits to make up the difference.

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Regular commercial lenders won’t lend on regulated loans. Therefore the property needs to be more than 60% commercial for them to consider it. Additionally, the repayments for the commercial loan need to come from the commercial activity of the property. They generally won’t include employed income or income generated away from the commercial property venture.

Navigating this complex sector of the market is best done with the aid of an expert who has knowledge of both the residential and commercial mortgage market.

Beware unregulated lenders securing loans on your home

The subtle difference here is that the loan can be granted to your business which needs to be a limited company rather than a sole trader. It is still secured on your home. However, its not regulated in most cases as the loan is not made to you personally. It is a loan to a business. Generally these are secured homeowner business loans. The advantage to the business owner is that the requirements to be accepted maybe less rigorous. The main disadvantage is that you may lose much of the consumer protection you get by dealing with lenders which are regulated by the FCA.

Commercial loans can be available as a first, second charge or third charge. Loans are available for those with good trading accounts and a good credit history. There are also options for those with poor accounts and credit problems. Pricing is influenced by these factors as well as the value and type of property being offered as security. If an unregulated loan is your only option, go for a lender which is regulated for it’s other activities. As a regulated entity it has a duty of care to you irrespective of the type of loan it is offering. If the lender is not authorised and regulated by the FCA check the small print very carefully. Make sure you understand the potential risks. Talk to an FCA authorised broker before committing yourself.

Commercial loans secured on business premises

This could be a commercial loan secured on the property your business trades from or secured on commercial property you rent out as an investment.

Again there is a huge choice of lenders with differing appetites and differing terms.
The property offered as security could be anything from a factory to a hotel, to offices, shops or even residential buy to let houses and flats.

The loan purposes can vary massively. This includes buying property to trade from, capital raising to buy more property or even short term bridging loans to renovate property for profit.

For more information, work out what sort of borrower you are, what type of loan you need Then choose from one of the links below for more detailed information.

Mortgages on commercial property for business owners and property investors

Short term bridging loans

Property development loans

Buy to let mortgages and loans

Unsecured business loan

Some lenders will offer unsecured loans to businesses at very competitive rates. They will be looking for strong trading accounts and a relatively good credit history. This would be ideal for borrowers who have just fallen outside of their banks lending policy. Also for those wishing to keep their affairs separate from the bank.

For those who perhaps have a poorer credit history or a less than sparkling set of trading accounts, lenders and products are available on the basis of lenders offering rates which reflect their perceived risk. It’s always worth exploring this option first to raise the cash you need due to the wide choice of products available.

If you have just started your business, or need a loan to get it started, there is less choice of lenders. However there are specific schemes designed to help new business with up to £25,000 available per director or business partner and exceedingly competitive rates

Unsecured business loans for established businesses – click here

Unsecured business start up loans – click here

Factoring / Invoice discounting

This is a good solution to improve cash flow for businesses which have a significant book of clients which owe them money. If you are giving your clients 30 or 60 days credit you usually can’t get your hands on the cash quickly. This can stifle growth or put the business at risk. A factoring lender will advance you a percentage of the value of invoices on an ongoing basis. therefore you get paid on the jobs you invoice straight away.

In some cases the lender will take over your credit control and chase payment of the invoices for you. This also ensures they get paid. If your business has adequate controls in place the lender may allow you to chase the invoices. This means your clients are never aware that you are using a factoring service. The charging structure on factoring is bespoke to your business. Pricing is influenced by the quality of your clients and the likelihood of them paying their invoices. If you have government or large corporate contracts you are likely to get a better deal than a business with less stable clients.

Credit Card / Merchant cash advances

This is an unsecured cash advance facility attached to your credit card (PDQ) machine. It is ideally for businesses in retail, ecommerce, hospitality etc. You can borrow a percentage of your PDQ turnover and repay as a percentage of your PDQ transactions. This means that if trading is quiet you repay less. It is generally used as a short term facility to fund cash flow, growth, stock or refurbishments. It is fast to arrange but most likely will require you to change your credit card machine.

Asset finance – purchasing vehicles or equipment

If you need to purchase new equipment, asset finance allows you to do so without paying upfront. It encompasses hire purchase & leasing and spreads the cost of your purchase over a period of time. This can improve cash flow or profits. The loan is generally attached to the asset. The terms available will depend on the asset type, how much cash you are putting in to the purchase and the type of finance you are selecting. The strength of the business is also a factor with a range of lenders available to suit businesses in various sectors and all types of profile.

Short term – asset finance

This is a more expensive option used for short term cash flow where a company or personal asset is offered as security.

Often the item is held by the lender until the loan is repaid and interest is charged monthly. Typical assets offered as security include luxury cars, jewellery, works of art, even boats. Lenders are really only concerned with the value of the asset and will sell it if the loan isn’t repaid. Therefore they don’t tend to worry about proof of income or credit history.

Non bank overdraft commercial loans

If you can’t obtain a bank overdraft you could consider a factoring facility. This allows you to draw down funds up to an agreed limit as and when you need them. The lender sets the deal up in a similar manner to factoring but with a flexible draw down facility. Therefore, you only pay interest on the funds you are using.

Pension led funding – Commercial loans using your own pension money

If you have accumulated pensions through your working life and you are a business owner, you may be able to release the pension funds for the benefit of your own business. This can give you a cash injection to help your business grow.

It is vital you take advice as the tax implications and impact on your pension needs to be considered. We can put you in touch with an expert who can explain how pension led funding might work for you.

For more independent information about commercial loans click here

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