Usually, a lender will expect you to put in about 20% of the purchase price. What you got to remember is that when they’re using their estimate of 80% of the value, they’re only estimating that value on goodwill, that don’t include the fixtures and fittings in there. It’s important to remember that if the fixtures and fittings figure is quite high. It can on occasions be possible to get 90%, That’s due to circumstances such as being able to provide some freehold security. In some cases, we have achieved for clients 95%, again using freehold security. Minimum requirement for cash is 5%. As I said at the beginning, usually, it’s 20%.
When approaching lenders for a squat practice, interest rates are slightly higher than for an established practice that’s on the market. The reasons for that obviously are risk. Because you are starting up a brand new practice with no income. Therefore, the lending is based on projections, your experience, and what other income you can bring into the business to cover the period where you’re starting to build the business up. Banks will lend on squat practices, and they will lend to about 70% in general, and the rates normally are in the high 3’s early 4’s.
Sometimes you can find a practice, and it can be a great location, and it can be a practice with lots of opportunities to grow. But because for instance, it’s loss making at the moment, you’re gonna need projections. Some lenders 00:24 lend against projections. What’s important when you’re putting together projections is to make sure that you’ve got a very solid business case. That requires quite a bit of work and accountants need to put together those numbers for you, so that they can see the assumptions, and they can see that they can test it. It’s also important to bring to that your experience, perhaps you have another business, perhaps you have some freehold security you can add to the package. You got to make it more attractive for the lender. At the end of the day, you got to understand that lender is lending you a substantial amount of money and secured. Therefore the projections have to be viable and understandable.
Often asked whether you have to bank with a lender. In most cases, the answer is no. You obviously have to have a current account, because the loan payments have to come out of that account to service the loan. But you can actually bank elsewhere, and it’s quite common. Because very often, if you wish to use a branch, it may be that that bank hasn’t got a branch local to you. It may be that you’ve already got an existing business account with a bank and a relationship that you want to keep. So no, you don’t always have to bank with a lender to do your business’ day to day banking, just enough to transfer into their accounts to cover the loan payments.
The question of whether you offer security is often raised. In many cases, there is no need to offer security. But there are obviously huge advantages to doing so.
1) you can often secure a larger amount,
2) you can often get a better interest rate. You won’t necessarily get a better interest rate across the whole loan that you’re taking, but you will over the part that is secured. It’s possible sometimes to offer a second charge over your own house, or a charge over a buy-to-let on another property that you own. If you do that and you offer that up, then, the banks will readily take it because obviously, it’s securing their loan. The role that I play here is to make sure that you only offer what you need to offer, and that you achieve the best rate possible. If I think that a better rate can be achieved, or a larger amount can be achieved by offering security, we will discuss that in early stage.
You often hear and often see on people’s websites that a broker gets preferential rate from a lender. Prior to me being with Samera Finance, I was head of healthcare for RBS in the southeast in London. We never gave preferential rates to brokers. Most lenders use a formula for calculating the interest rate. They input the amount of debt, the term, what it’s for, and they give a rate. There’s sometimes some tweaking around that, but it can be done. What you do get with a broker is hopefully the knowledge of who can tweak a rate, who can actually perhaps reduce it by a couple of points.
You also get brokers such as ourselves who can place deals where sometimes you don’t pay an arrangement fee. It’s important also to know which lenders will require a valuation. Some lenders will not require a valuation and that can be £2,000 – £2,500. Some lenders will also at certain debt levels, require you to employ their solicitors as well to act on their behalf, so you end up with 2 forms of solicitors which is double the cost in effect. There are many lenders out there who don’t use that system. That’s how a broker can bring you value, and can bring you savings. Not alone to just to save enough time in tracking down lots of lenders, but also holding your hand through the whole process, and bringing you to the actual date of completion.
In some cases, it is possible to avoid the payment of an arrangement fee. It depends on the size of the debt and which lender you go with. That’s one of the things that can save you a large amount of cost upfront. The other thing is you have to pay an arrangement fee, many lenders will add it to the loan. Therefore, you can pay over a period. Once you pay a small amount of interest on that, it does ease your cash flow at the beginning which is very helpful for you when purchasing a business.
If the bank requires a valuation, over time we’re asked if you have to pay for it, and the answer is yes. Once a valuation is addressed to the bank, and the value is working on behalf of the bank, the client pays for the valuation. However, again, you need to look up what sort of loan you’re taking, what sort of value, and what you’re purchasing. Sometimes, it’s possible to place you with a lender who doesn’t require a valuation. As I said, that depends on debt level and location and the actual deal itself. But with the knowledge that we hold as brokers, we can place you a deal with someone who doesn’t require a valuation. But you do get a choice. If you have to pay for a valuation, normally, a lender will give you three choices, and you will pick the value yourself. You have to remember that the value is working for the bank. Once he’s done the valuation, that is the valuation the bank will work with.
Lenders often use their own form of solicitors which can be very frustrating because it obviously increases the cost, because you have to use your own solicitors as well. They’re used mostly to check the work that your solicitor has done to protect the bank. Normally, it’s done at a certain level of debt. Most banks will bring their own solicitor in a certain level of debt. There are however some lenders, especially where lending is more difficult and perhaps a higher rate, a higher percentage is being lent, they will ask for their own solicitors to be involved as well, just to make sure that everything is tied up neatly.
If you trade as a limited company, can you get a mortgage is often asked. And the answer to that question is yes. There’s no restriction on people not getting mortgages because they’re a limited company. There are more and more lenders coming into the field now to lend to limited companies. Some years ago, perhaps 2 years ago, it was quite difficult to get a property mortgage through a limited company, because not many people did it. Every month, more and more people come into the market, so it is getting easier and easier to do that.
If you get to the end of the year and submitted your year returns, and you find you have a tax liability, and you haven’t prudently put the money inside, then it is possible to get a loan to repay your tax liability. You clear off the revenue which is good to get them off your back, and then you have to pay back the loan over a period. Normally, these are period of 12 months only. The reason for that being obviously that once you get to the end of that 12-month period, you may well have incurred another tax liability and therefore, they won’t let the loan run past the term. It is 00:46 be paying the loan of say £30,000 or £40,000 over a year, but it does clear the revenue, and it does allow you a period to earn the income to repay the loan.
The question of whether to use a commercial finance broker often comes up. As we’ve said in the previous videos and webinars, the reason you employ someone like myself as commercial finance broker is to pick up on the 38 years of banking experience and a knowledge of the market. If you think about all the years of experience I’ve gained in banking, and the understanding of how they work, what they require, what they need and how they will respond to you, it is all very important.
It’s all about what the commercial finance broker will do for you. It’s not just about finding the loan for you, it’s about structuring the deal in a way that will work better for you. That might be by fixing some of the rates, it might be by doing the loans over different terms. It might be by doing different types of finance such as asset finance and loan finance. Also, we can place it with lenders who may not charge you a fee for the arrangement of the loan, we can place it with some of the lenders who will not take security. Sometimes, we can get longer terms or actually higher percentage rates by tweaking your application in such a way that makes it more acceptable to the bank. All those things are very important.