The pandemic has made raising capital a real challenge for many business owners. Although the government’s bounce back and CBILS loan schemes have largely been a success, restrictions have continued for far longer than anticipated by many. As such, we’re witnessing business owners with fixed outgoings struggle for cash flow as their business either faces restricted trade or continued closure.
This guide will break down the pros and cons of borrowing against your business premises, the products available, and how to find the best deal while avoiding common pitfalls.
The pros and cons of securing borrowing against your property
Choosing to secure borrowing against your business premises can be a big step to take. Although unsecured business loans generally come with some commitment in the form of a personal guarantee, the lender does not take a legal charge over a property. There are advantages and disadvantages of each route, and the most appropriate option depends on your current circumstances and what you’re looking to achieve.
Pros
- You’re more likely to be approved for borrowing when securing against your business premises as the lender’s risk is reduced due to the equity in the property.
- Loans can often be arranged over longer terms, which may allow you to borrow more, while still keeping the monthly payments affordable.
- The interest rate charged is likely to be lower than those on unsecured loans.
- Some products will be relatively simple to arrange with little scrutiny of your financial position, with the focus being on the security offered.
Cons
- Secured lending against your property often requires a survey report and additional legal work, which can slow the process down.
- Should you fail to keep up the monthly repayments, your property will be at risk of repossession.
- If your property needs work, it may not be considered suitable security for a loan.
The products available to business owners
When we consider loans secured against your business premises, although the basic principle is the same, there are different products to choose from. Choosing the most suitable type of loan, and then the right product is key to the success of your business.
Secured business loans
Secured business loans work in much the same way as their unsecured counterparts. They allow a business to borrow funds, which are then repaid over a period of time through monthly repayments, usually over a maximum of 7 years. The rates charged are usually lower than those on unsecured business loans, often in the region of 7-10% per year. Applications usually take 2-3 weeks to complete, so although they aren’t as quick as unsecured lending, they do provide relatively quick access to funds.
Commercial mortgages
Commercial mortgages can be taken over a longer period, usually up to a maximum of 25 years, with rates of 2.25-3% per year common. This means that commercial mortgages often come with very low monthly repayments and can be a great option when cashflow is tight. Commercial mortgage lenders usually allow you to borrow a maximum of 75% of the property’s value and will require a first charge. The application process can be difficult to navigate and as such you must be prepared to provide a lot of information as the affordability and other checks can be very detailed. When taking on a new commercial mortgage, you can usually expect your funds in 8-10 weeks.
Bridging finance
Bridging finance is a type of short-term, property-backed loan which is designed to cover an urgent funding need. Bridging loans are usually used to provide access to funding for a period of up to 18 months before the property is either sold or refinanced onto a commercial mortgage. Lenders are generally happy to offer a maximum of 70% of the property’s value and can release funds in as little as a week. The application process is also very simple, with little information required. Where needed, the lender will often allow the interest to roll up on top of the balance, meaning there are no monthly repayments to make. Although these loans can provide crucial funding for business owners, there is a downside. The interest rates charged tend to be much higher than commercial mortgages, usually costing 7.8-12% per year. Bridging loans should generally be used as emergency funds and should not be considered as a long term option.
How to find the best deal
The best deal will depend on the factors that are most important to you and your business. For example, some people see simplicity of the application process as the main driver, others want low interest rates and some want speed of completion. Regardless of the main drivers for you, there are a few steps that you can take to save money. All of these products can be compared by speaking to a reputable fee-free broker, who will be able to compare the options and present the best deals to you. If you don’t want to use a broker, you can compare products yourself by speaking to several lenders. Some brokers charge fees, of course, if you find one that you like you may consider paying for their service. I would advise against paying upfront ‘commitment’ or ‘application’ fees to a broker under any circumstances.
Finally, when comparing products against each other, you should compare the total cost of the loan, rather than just the interest rate charged. This will ensure you’re paying the lowest possible amount back in addition to the amount borrowed. A good broker or your accountant should be able to help you compare products in detail.
