When clients come to us, we love to be able to help them fulfil their funding needs, but at times it’s just not possible at that time.
There are times when unfortunately, a business doesn’t qualify for a commercial mortgage with a mainstream lender and here we address the main reasons why.
When we’re approached about commercial mortgages, some clients are in the belief that lender LTVs (Loan to Value) are akin to those within the residential mortgage space and that is not the case. The average LTV for commercial mortgages is around 65-70% although some high street banks will consider higher for owner occupied property for businesses in their preferred sectors such as healthcare, professional services etc. When considering a commercial mortgage, we would always suggest that a business has at least 30-35% to contribute. Extra funds also need to be available for the extra costs such as valuations, legal fees, stamp duty etc. It’s also worth looking at whether the property you’re interested in has VAT to be applied as lenders will only lend on the net amount. That said, there are lenders out there who can assist with a short-term loan to cover the vat element until a rebate is received from HMRC.
If your Business is sufficiently profitable, it’s also possible to obtain funding from specialist lenders for part of the deposit – say for half of it, so perhaps 15% of the purchase price.
Accounts don’t evidence that the loan is “affordable”
Most lenders apply a similar method when calculating the affordability of a loan. Generally, they will take the EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation) So in layman’s terms, they take the operating profit and add back the depreciation for the year, the rental Income (if that is to be replaced with the mortgage payment) and any obvious “one off costs” from the Profit and Loss statement.
They will then need to consider any other loans / HP finance in the business and calculate the monthly commitments to service those facilities. (Lease agreements aren’t included as these are already accounted for in the Profit and Loss.) What you’re left with is what they call “serviceable income”.
Lenders will each then have their own ratio as to what level of “serviceable income” is required to repay the loan. With the high street banks, they tend to like to see up to 2 X debt service cover of ALL loans. So that means if new loan repayment, plus existing loan commitments are £1000 per month, they want to see £2000 per month as available income.
Other lenders may have a lower debt service cover ratio, so perhaps 1.4 X cover after existing loan repayments are deducted.
With the recent schemes such as Bounce Back Loans and CBILS, we are seeing more cases where the existing levels of debt within the business means that a new loan is simply unaffordable.
So what can you do?
Increasing the amount of deposit you have available does present a challenge, and if additional borrowing is required then you need to take into account how that additional loan will affect the affordability as mentioned above. In addition to this, some lenders don’t like to see deposits being “borrowed” money.
In terms of improving the affordability issue, it’s worth looking at the amount of debt within the business already to see if the existing monthly repayments can be reduced in some way. Can you settle off any existing loans? (Without wiping out the funds set aside for your deposit of course) Or perhaps it’s worth exploring whether existing loans could be consolidated in some way, by replacing numerous loans with one loan, spread over a longer term perhaps?
We’re always on hand to have a chat to look at ways in which your chances of being accepted for a commercial mortgage are improved. So, if you’re considering purchasing property in the future, it may be worth looking at these issues sooner rather than later.
The affordability criteria that different lenders have varies enormously and needless to say, we will recommend a lender that has the best combination of rates and criteria in this respect.