Commercial Lending Explained
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Loans advanced to businesses, rather than consumers, are called “Commercial Loans”. They are
usually used for short-term funding needs but can also be longer term.
There are various types of commercial lending available such as:
Secured Loans – is where the Lender will secure their sum lent to your business against your
company assets such as commercial property, vehicles and/or machinery. The amount you can
borrow will be directly related to the value of the assets owned by your company. This gives the
lender the ability to recoup its costs by repossessing and selling the assets should your business
default on the loan.
Unsecured Loans – a small number of Lenders will actually offer unsecured loans (i.e. requiring no business assets as collateral), but the borrowing business will usually have to have an excellent credit rating and evidence of an exceptional trading track record that demonstrates their ability to repay the loan with minimal real risk to the Lender. The benefit of an unsecured loan is that it won’t put your business’s property or assets at risk; however, due to the higher perceived risk level for the Lender, unsecured loans are usually subject to higher interest rates and the loan period is usually shorter.
Bridging Loans - these can be a suitable short-term lending solution to raise finance. Such loans are used to ‘bridge a gap’ or provide funding while waiting for another event to occur. Bridging loans are commonly used:
- For payment of a deposit for a property purchased at auction, where exchange takes place on the day of auction
- To purchase or refinance quickly
- To undertake refurbishment work on an uninhabitable property, which would not otherwise be mortgageable
- To purchase property or land while waiting to obtain planning permission
- To buy a new property before an existing property has sold
- To pay an urgent bill which, if unpaid, might lead to the enforced closure of the business
Commercial Mortgages - in most ways, a commercial mortgage is similar to a residential one. A company will take out this type of loan when they acquire a property intended for commercial use, with the loan secured against the value of the property. As with a residential mortgage, the Lender will assess the business to ensure it can afford to repay the loan.
However, there are differences. For example, while you can get a fixed rate deal for residential mortgages, this usually won’t be the case for commercial ones. You’ll also pay higher interest because lenders usually perceive commercial mortgages as higher risk.
Development Finance - is a short-term loan specifically advanced for the purpose of funding property developments and refurbishment projects. The amount lent depends on what the gross development value is estimated to be (i.e., how much the development will be worth once complete). The maximum a lender will usually be prepared to offer is around 70% of the land cost and 100% of the build cost, although this may be lower. For most lenders, the sum offered won’t exceed 70% of the total gross development value.
Peer to peer lending - otherwise known as social lending or crowdlending, peer to peer lending enables individuals to borrow directly from individuals wishing to lend, cutting out the middleman of financial institutions and instead transacting via a website that sets rates and terms. It’s attractive because investors with money to lend often benefit from higher rates, while borrowers typically pay less interest. There are risks, however. This type of lending is not covered by the Financial Services Compensation Scheme, for example, and as with any investment, there is the risk that you won’t get your money back.
NOTE: Bearing in mind any form of commercial borrowing by your company has a notable potential impact on the future success of your business it is essential that you seek professional advice to fully understand the pros and cons of each borrowing option.
Your assets may be repossessed if you do not keep up repayments on a mortgage/loan or any other debt secured on them.
If you would like to know more about Commercial Lending, simply click on the link below and complete the quick enquiry form or email us at enquiries@princewealth.co.uk and we will be in touch.