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RAISING FINANCE FOR YOUR BUSINESS PURCHASE
Following the recent announcements that residential mortgage borrowings are the lowest for 2 years and The Northern Rock debacle in September brought to a head the issues with sub-prime lending – much of which is associated with a world-wide banking insecurities
*Stephen Johnson looks at the effect that the liquidity crisis has had on commercial lenders and brokers. “The current lack of liquidity and change in credit appetite within the wholesale finance markets, and its probable consequences, has been widely covered in the media. But what will the effect of all this be on the UK commercial mortgage market?Regarding lenders, smaller commercial lenders will undoubtedly find their funding harder and more expensive to come by.
Recent market entrants have established their business models around the capital markets, either here or in the US, and will face the prospect of warehouse funding at higher rates with more restrictive terms, together with higher securitisation costs once volume is sufficient to complete a transaction.
Niche lenders relying on banks or building societies for either their funding or to acquire their loans post-completion will face the same issues – appetite has shrunk but demand remains and pricing is moving up.”
This all means that lenders are more nervous than ever which means for us, looking to borrow money, it’s harder than ever. You could be looking to refinance your business, or you could looking to buy a new business, maybe for the first time.
So how can you make sure your loan is agreed? First of all – financing can be daunting and whilst you can do it yourself, often professional advice can make all the difference between success & failure.
Whatever, as soon as you start shopping around for a loan, you’ll probably be inundated will calls and letters from people offering you money and all sorts of deals.
But how do you know that offers you’re getting are the right ones for you?
Is that “Independent” Financial Advisor, knocking your door, really the best person for the job?
Many are affiliated to finance houses, and therefore can only tell you about the products within their own range. Some, as in all industries, are better than others and some will only be interested in a quick win for them.
Some will work free of charge to you, being paid on average 50% of the loan arrangement fee as a commission – therefore the higher the arrangement fee, the higher the commission they will earn.
Others will change an initial fee for unbiased advice - working on your behalf, negotiating the lowest fees & terms possible – potentially saving you considerable sums over the longer term.
A few well placed questions can help you sort the wheat from the chaf:
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How much experience do they have?
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Are they fully accredited?
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Will they provide reference from satisfied customers?
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Are they "tied" to specific lender (s) - in other words are they able to go to any lender for you?
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How long do they keep their customers - do they have "one-off clients" or do they build long-term relationships based on trust and continued good service?
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How well do they understand the hospitality sector?
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Can they tell you about grants and other, alternative sources of funding?
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Are they paid by commission only or do they act on your behalf and take a fee?
A word of warning – going to lots of lenders and allowing them to perform a “credit search” on you to be able to provide a decision in-principal to lend, could result in badly damaging your credit rating. Potentially reducing your chances of obtaining your commercial loan - searches leave “footprints’” which reduce your credit score.
They can also be used by brokers and lenders alike as a method of tying you to their services. Whether or not you choose to use a professional advisor.
The following section is designed to answer some of your likely questions.
How much will you need to borrow? This will depend upon a number of factors.
How much you can invest into the business – taking in to account the purchase price, setting up costs, how much you may need to spend on improvements or refurbishments, working capital, cost of moving inc stamp duty, legal fees, etc.
Take into account that income generation in an established/trading business will be easier to generate than if you are buying a non-trading business e.g. if you are buying a house to convert into a B&B.
Evaluating your business: The amount that you can borrow will be dependant on a final business evaluation report – this will provide an impartial and comprehensive report on the business taking into account current and potential performance. It also gives a detailed assessment of the bricks & mortar value, fixtures and fitting and goodwill.
How much will you be able to borrow? This will depend upon the type of business you are intending to purchase and whether or not you’re able to offer an acceptable form of security, as lenders base their decisions and terms against the risk of their loan not being repaid.
They also consider what you are borrowing for – for the property alone or are you including equipment, vehicles, goodwill and running costs.
It is possible to offer additional forms of security to strengthen the deal and /or improve the quality of the overall package. For example, this could be your own home, investments and/or other assets.
Don't give up on the 1st refusal - this may not be the disaster you think it is. Take it as a sign that there could be something amiss with your proposal. Or it may simply be that they've failed to understand the proposal/business plan (which is where professional support can come into it’s own)
Play the ‘What if?’ Game. Think the unthinkable - what if you go ill? Or business takes a down-turn for some reason? If you can demonstrate that you’ll be able to manage if times get tough, then you are more likely to attract to a lender.
Freehold/Leasehold Properties: As a rule you can expect to be able to borrow between 70% - 75% of the bricks and mortar value, although like with all rules there are exceptions to this guide.
These rates can also be affected by the additional security mentioned above.
The purchase of equipment or vehicles: Hire purchase or leasing can be appropriate options when finance is being sought for necessary equipment or vehicles and can be very tax efficient. As they are secured upon the asset itself they tend to fall outside the loan to value criteria mentioned above.
How much should you borrow? It will depend on lots of variables, but as a guideline, borrow enough to be sure that you can meet your bills, but don’t borrow more than you can afford to pay back.
What options are available?
Lending – there are different types of lending deals from variable rates linked to bank base rate, fixed rates or even a combination of several products – again this is where independent professional advice can be worth its weight in gold.
Loans are generally structured as a repayment loan however, most lenders will agree up to 2 years initially on an interest only basis.
Grants – Capital grants can involve expanding, modernising or restructuring an existing business or setting up a new business. Only projects that offer good prospects for a sustainable business development and maximise the economic benefits for regions will be eligible for a grant.
Depending on where you are in the country there some tourism specific or other grants available for training, business support and IT.
Leasing – Purchasing a lease to a business – mostly, but exclusively, this will be pubs and restaurants. A key factor here will be the length of the lease you are intending to purchase.
At the moment you may find many lenders reluctant to get involved in funding leases, but there are some that will.
Plus there are alternatives like pub management companies, private funders and the occasional high street bank. There is a risk with these as some will require terms which makes it hard to achieve good profits.
Also some brewery lending will tie you into stock purchase agreements with higher terms than if you were able to purchase freely.
Hire Purchase – as with all unsecured lending this is an expensive option, but can extend your capacity.
* Surviving the crisis //www.mortgageintroducer.com
If you're buying or selling a business click here. If you need help in your business planning or locating finance email us and we’ll be able to let you know about experts who can help.