Commercial lending is an area of increasing opportunity for brokers. The growth of self-employment in recent years has resulted in 15% of the workforce now working for themselves or running their own business. This means that more than one in seven of your clients potentially have a requirement to raise funding for business purposes on top of their personal lending needs, not to mention your investor clients who might want an alternative to standard buy to let. This provides you with opportunity to strengthen your relationship with those clients, by providing them with new solutions, and also to diversify your income.
The good news is that you don’t need to be a commercial specialist to benefit from the demand for commercial finance. By working with Brightstar you have access to our team of commercial experts and our comprehensive lender panel, which covers the full spectrum, from high street to challenger and specialist lenders, including those that are not available on a direct-to-broker basis.
We’re here to guide you and your client through the entire process, but to get you started, here’s the Brightstar Guide to Commercial Finance.
What is commercial finance?
Commercial finance covers a broad spectrum of areas, including lending on commercial or investment property and non-property lending to raise funds for a commercial purpose.
Lending on commercial property
Lending on commercial property can include:
- Businesses looking to purchase or refinance their own premises
- Investment mortgages to fund the purchase or refinancing of properties that will be let to businesses for rental return and capital gain.
- On some occasions a commercial mortgage can be used to fund a particularly complex transaction on residential investment property, such as apartment blocks of flats above commercial premises.
The types of property covered can include:
- Retail units, industrial units and warehouses
- Single offices and office blocks
- Forecourts, petrol stations and car washes
- Public houses, restaurants, hotels and guest houses.
- Care/nursing homes, child day care nurseries
- Holiday and caravan parks.
Commercial lending for owner occupied/trading businesses
Commercial mortgages for owner occupied property are aimed at trading businesses that want to purchase or refinance their own premises. They can cover a variety of property types such as retail units, offices, factory units or any commercial premises used by the business.
The maximum loan amount is normally 80%, but in some circumstances up to 100% may be possible. Interest rates start from around 2% over the base rate and lender fees from 1%. Repayment loans are typically over 20 years, but interest only facilities can be arranged. The funds can be borrowed in personal names, limited company, pension fund or trust.
Mortgages for commercial property investors
Commercial investment mortgages cover commercial or mixed-use properties that are being purchased for rental return and capital gain and lending can be against any type of commercial property, including offices, shops, industrial units etc.
With the right property, investors in commercial property can earn a good yield on a full repairing lease, with tenants generally tied in for longer periods than a standard AST, so they can have real stability.
The strength of a lease is an important consideration when it comes to a commercial property mortgage, but lenders are becoming more flexible on the types of lease they will allow on commercial properties. Traditionally, high street lenders would want a five-year lease on a commercial property, with no break clause, but the challenger banks reduced this requirement to two years and some lenders will now allow a rolling a lease, which can make the property more attractive to potential tenants.
First-time investors in commercial property will have a more limited choice of lenders, but it is still possible to source a good deal for a first-time investor and lenders will base their decisions on the strength of the tenant and the debt service cover.
Understanding what is required on leases and which lenders will consider different types of lease is one of the most complex elements of commercial property lending and we can help by providing the expertise to identify the most suitable product for a client’s circumstances.
Often an investor may want to purchase a property in need of renovation before it can be let to tenants and, at Brightstar, we are able to work closely with our Short-Term Lending team to provide bridging finance to prepare a property to be let and then provide the exit with a longer-term commercial loan.
Commercial mortgages for residential property investors
Sometimes a commercial mortgage can be the appropriate solution for larger or more complex residential properties that are being purchased for rental return and capital gain. Lending can be against any type of multi-unit residential property such as apartment blocks, HMO’s, student lets or portfolios.
Non-property commercial lending
At Brightstar, we can provide a range of funding for trading businesses to meet the specific requirements of your clients, including overdrafts and revolving credit, acquisition finance and supply chain finance, amongst other solutions.
Three of the most popular areas of non-property commercial lending, asset finance, invoice finance and unsecured business loans.
Asset finance helps businesses to grow by providing lending for the purchase of company assets, such as tools, equipment, vehicles or furniture. Here are some of the main types of asset finance
- Hire Purchase – One of the most common types of asset finance, hire purchases enables a business to hire an asset from a leasing company over a set amount of time. Once the payments have all been made, the company owns the asset.
- Finance/ Operating Leasing – This enables a business to use an asset for a fixed period of time in return for regular payments, however the business will not have ownership of the asset at the end of the term.
- Asset Refinance – Asset refinance has become more popular in recent years and can help a business to free up cash by selling assets to a lender and then leasing them back. This provides a cash injection for the business and also lets it retain the use of its assets.
Different businesses have different requirements and there are lots of options available from a wide array of lenders – from the main commercial banks, through the smaller niche banks and the private, non-bank lenders.
Invoice finance can help trading businesses to manage their cashflow by providing cash at the point of invoice in exchange for a percentage of the sum due. There are two main types of invoice finance:
- Invoice Factoring – With factoring a lender will look at the debtor book of a business and take a percentage of the qualifying invoices in return for making payment upfront and managing the credit control. This effectively means that the lender will issue and chase the invoices and then take payment on those invoices. Not all debtors to a business will be factorable and a lender will review the business and its debtors to ascertain the approach it will take.
- Invoice Discounting – Sometimes known as confidential invoice discounting, this approach is used with bigger companies that might not want their debtors to know that they are accessing invoice finance. With confidential invoice discounting a company will retain management of its own credit control and can exercise more flexibility with its terms. A lender will therefore want to ensure that the business has appropriate processes in place and, for this reason, invoice discounting is usually only available to larger businesses with a turnover of at least £500k.
It is worth noting that not all debtor books can be factored or discounted and that fees are negotiated by lenders on a case by case basis. As there is no tangible security, loans can be processed quickly – often within a week, and lenders pay an upfront fee to brokers plus a fee for every advance. This can provide a source of recurring revenue, which can help to strengthen your business.
Unsecured business loans
Unsecured business loans allow businesses to expand and can be used for a variety of reasons. Finance is available from a wide array of specialist lenders allowing many business types and sectors to be considered. The funding is usually quick and easy to arrange, particularly in comparison to commercial mortgages.
Unlike commercial mortgages funds can be available in days and many clients will use them for short-term requirements as they can provide a quick and easy solution to support cash injections for their business, funding growth, raising any shortfall for a deposit on a commercial purchase, or even providing the ability to 100% purchase on a multitude of commercial assets without having to provide a tangible form of security
This has become an attractive avenue for business owners as it can be achieved with minimal information, typically two years trading accounts and three months business bank statements will be enough to obtain an option for lending within 48 hrs. Clients can also receive the funds within two weeks of submitting an application.
The speed and convenience of the product does demand a greater premium, with rates on unsecured commercial finance typically higher than standard commercial mortgages. But, for many clients, unsecured lending can be a great way of raising funds quickly, negating additional costs of valuation and legal fees or quite simply piece of mind that a business asset has no direct charge registered against it and can’t be seized.
The ability to redeem an unsecured loan at any point throughout the agreed term penalty free provides a layer of flexibility and overall control is in the hands of the borrower. So, for clients who want access to fast and convenient funding, an unsecured loan could prove the most economical option.
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