Commercial lending

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Secured and unsecured loans

A business will usually be able to borrow more than an individual consumer. This is normally because the loan can be secured against company assets such as commercial property, vehicles or machinery. The amount you can borrow will be directly related to the value of the owned assets. This gives the lender the ability to recoup its costs by repossessing and selling the assets should the business default on the loan.

Some lenders will also 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 be able to demonstrate their ability to repay the loan. The benefit of an unsecured loan is that it won’t put the 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.

Types of commercial loan

Businesses take out loans for a wide variety of reasons. Below are listed some of the most common types of commercial loan.

Bridging loans

Bridging loans 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

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

This 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.

Come to us

With so many different types of loans and lenders out there, the world of commercial finance can seem daunting. We can help. We can advise on the best options for your specific circumstances and goals, so you can take your business to the next level.  Just get in touch.