Unless you’re sitting on a wad of cash, the majority of your property purchasers are going to be financed through ‘high street’ buy to let ‘sausage machine’ operators.
‘Traditional financing’ is fine until you own 10 properties plus. Then most lenders will cut you off.
They will tell you you’re over exposed. You have “too many” properties. You no longer fit their criteria.
You see, although Buy to Lenders cater for the mass market, they have rigid criteria. If the computer says ‘no, you ain’t getting our money’
I’m sure you can relate?
Essentially the problem is two-fold. You can’t get finance yet you want to keep investing and growing your property business.
So what can you do?
One thing is to apply for commercial finance. This is where finance is conducted outside of the CML handbook and is usually for businesses.
They don’t advertise their rates or criteria as they usually held in the bank’s own portfolio, rather than sold to the open market. Yet provide a much more bespoke service.
But they look much more closely at You – the borrower. They will ask to see your assets, liabilities, bank statements, experience, history, PnL and essential your background.
And if that seems like too much hassle, it’s because they need to build a profile of the business they are dealing with, in order to make a more rounded and ‘commercial decision’
Here Simon Grace gives you the lowdown on the ins and out’s of using commercial finance:
When looking to buy investment property there are many aspects to consider, with the choice of how to fund the acquisition being towards the top of the list.
Options such as buying with cash, the use of a regular buy to let mortgage, bridging funds and commercial finance are just some of the options available and all offer definite benefits and drawbacks.
Commercial Finance is a term that is banded around more frequently by investors; it seems that we should all be using it to build our property empires, but why? What is it? Is it really that great and should we all be using it?
What is Commercial Finance?
Commercial Finance for property purchasing or refinancing is used in two main areas:
Business mortgage (also known as owner-occupier mortgage)
If you want to purchase a building, or refinance one you already own for your business to operate, from you will require a commercial mortgage.
Commercial investment mortgage
If you are an experienced property professional operating individually, as a Partnership, LLP or Ltd Company and either looking to invest in or refinance residential/ non-residential property, or a portfolio for the purpose of renting out, you might require a commercial investment mortgage.
Benefits of using Commercial Finance for Property Investment
Appetite of Lenders
Commercial lenders don’t tend to hold a restriction on the number of properties an investor has, unlike mainstream buy to let lenders.
They support professional investors by lending on many different types of property that high street funders perhaps don’t have an appetite for such as multi-lets, HMOs, non-standard construction, student lets, commercial and residential mixed use to name a few.
Criteria of Lenders
Minimum personal income requirements are not as important for a commercial lender as they prefer to consider the whole situation.
As well as the standard requirements for a deal such as security, repayment potential and the credit history of the applicant, the borrowers experience also plays an important part in the lenders decision. Commercial lenders will also consider applications from Ltd Companies, LLPs, partnerships as well as individuals.
Longevity
Commercial facilities can remove the ‘computer says no’ approach to raising finance. Some lenders encourage a face-to-face relationship and wish to support the business continually as it grows.
Having this type of arrangement with a funder is necessary for professional investors to ensure growth.
Any downsides?
Unlike the regular high street lenders, commercial funders may require an element of amortisation [debt repayment] and in some cases this can be aggressive, as short as 10 years.
It is important that this debt repayment is factored into calculations as it can have a great impact on cash flow [and might mean a position where tax is due on profits yet the money isn’t there to pay HMRC as it has gone to the bank].
Loan to values may also be lower than regular buy to let lenders and in certain cases the extra risk of non-standard property might mean an increase to the pay rate.
Why Use a Commercial Finance Broker?
1. Commercial finance advice should come from experts
Commercial finance is a complicated subject. Unlike standard residential mortgages which have neatly defined rates and criteria, commercial finance is much more tailored and requires a good degree of skill and experience to find the right deal.
2. Save time – and money
Shopping around for the best deal has become increasingly common and one of the main advantages of using a broker is that they will do that shopping for you.
3. An old-fashioned approach
Dealing with a broker means dealing with an individual. A broker is someone who will take the time to understand you and your business making sure they are in an excellent position to secure you the most suitable deal.
4. Never assume
The finance you think you need may not be the finance you actually need. This is another area where a broker can help.
