All business owners from time-to-time experience cashflow dips or periods of strong growth. When this happens, you’ll need to find the most cost effective way to raise funds for yourself by borrowing against your business premises and other business assets.
The most obvious choice to raise funds for yourself is to borrow against your business premises as typical funders are more ready to support with loans against ‘bricks and mortar’ collateral. Over the years, High Street Banks and other property lenders have been striving to lend to businesses who own their own premises and it has become a very competitive market.
If your premises are owned without any current borrowings outstanding generally you should be able to borrow up to 70% of its value (sometimes higher), subject of course proving that you can pay back the monthly repayment! The key here is serviceability, can the business cover the proposed new borrowing repayment from its day-to-day trading profits. This is a new commitment and you as a borrower and the funder will also want to ensure you can still meet this payment should interest rates rise or you have a downturn in business.
If you trade as a company and you own the property you may want to consider borrowing the monies personally and ‘renting’ the premises to the company at a market rent which may be beneficial for your personal income and goes as an expense against the company to reduce its tax burden.
In addition, you may want to transfer the property to your pension scheme (rules permitting) and use your pension as a tax efficient way of collecting rent form your business.
Any lender would want a legal charge over the property concerned giving it certain rights one of which is to sell the property if repayments are not kept up-to-date.
Rates for this type of borrowing vary from client to client and depend on the amount borrowed, sector, term and profitability of the business but are usually at a margin above Bank base rate ( base rate is currently 0.5%) and overall rates are typically 2 to 6% above base. Lenders also give options to fix the rate over terms of 5-15 years which gives certainty of repayments but could have potential redemption penalties if the loan is repaid early. So take advice carefully before you commit.
Arrangement fees of between 1% and 3% of the loan need to be factored in and legal/valuation costs will need to be accounted for.
So how do you raise funds for yourself? The key here is to ensure you present the best possible case for borrowing the money to the funder. This is where the skills of an independent commercial finance broker can help. You will need to provide up to date financial information on your business, projections are also useful ,and a clear idea of what the money borrowed is to be used for and a suitable timescale for repayment. A clear case presented with all the information required to satisfy the lender will all help in achieving a successful outcome in the shortest timeframe.
Finally, make sure you have an experienced solicitor to ensure you are fully aware of the risks you are taking on board both now and in the future.