Both start-ups and established businesses will require funding at some point and specialist lending provides a number of options for the entrepreneur to consider. Now, one of the benefits of having a competitive specialist lending sector is innovation. The sector exists because the lenders on the high street cannot or will not lend to certain individuals, institutions or businesses, but it has taken product innovation on behalf of specialist lenders to do this.
Because of this innovation, finance options in this sector are many and varied, competition is still strong and different business owners will have different needs. Therefore, it’s vital that advisers are able to access the whole range of finance options available to business owners, some of which may be less well known than others.
For example, second charge bridging loans can be arranged quickly to benefit the borrower. Clever Lending could arrange with Mercantile Trust loans up to £100,000 which are eligible for their in-house legal process at no legal cost to the client as well as a potential AVM meaning they can be turned around in days. A further reason why a borrower might opt for a second charge bridge is the ability to roll the interest so they have no monthly payment.
That said, there are times when this product is not suitable and that’s when the homeowner business loan comes into play. It has been designed to enable property professionals to release equity from their main residence for business purposes, to invest in new capital, machinery, stock or premises, for example.
It allows the client to access funds much more quickly than a second charge mortgage would allow or have a shorter term than they offer. In addition, the homeowner business loan is ideal when the borrower’s portfolio might not have the required equity or they are faced with the challenge of the first mortgagee not consenting. They allow business owners to use the equity within their main residence for business purposes enabling them to leave the portfolio as it is, protecting preferential rates or incurring costly ERC whilst achieving their expansion/upgrade objective.
We find that the typical business purpose use in this case is either portfolio expansion/buy-to-let deposit; the funding of the next business venture; a property purchase; Energy Performance Certificate (EPC)-related upgrades or another business purpose such as paying a tax bill. This is of course by no means an exhaustive list and at Clever Lending and Mercantile Trust we recognise that no two business related applications are ever the same.
If you’re not aware of these loans, then you may be surprised by the details. At Mercantile Trust, for instance, rates are low and loans from £25,000 to £250,000 are available up to 75% LTV. The term is from three to 18 months, with no exit fee and one unit of adverse in 12 months allowed.
What to consider
As with any bridging finance, there are ultimately four things that a lender is looking to get comfortable from the outset: the purpose of the loan; the experience of the borrower; the asset which they are securing the bridging loan over and the strength of the exit strategy (both primary and contingency).
The main consideration when looking at a homeowner business loan is ensuring that the borrower understands that they are releasing equity from their main residence to fund the business transaction.
The second issue is the exit strategy. The most important thing to consider with bridging both from a consumer and lender perspective is how the bridge will be repaid. This needs to be discussed with the client at the outset and needs to be both plausible and achievable.
Ideally with any bridge there should always be two exits considered. The primary exit is generally a refinance of the new investment purchase or the sale, while the contingency exit might be the refinance of the main residence. In the latter case, the broker would need to ensure that the customer would be able to refinance the main residence and would therefore carry out a full income and expenditure assessment which would include a 3% stress test. The lender will also validate this.
To provide an example of how product works, our homeowner business loan range recently enabled a borrower to purchase an investment property at auction.
Like any other bridging enquiry, the application was not without challenge. The customer needed to raise 75% of the property value to cover the purchase and refurbishment works, and the completion needed to take place in under four weeks. In addition, the main residence was purchased under the Right to Buy scheme.
On the day of completion, the broker found out that the client’s mortgage deed had been witnessed incorrectly. This led to our Northern BDM doing a four-hour round trip in order to ensure that the loan could complete in time, two and a half weeks into the four-week timeline.
As with any specialist finance product, the broker needs to establish that the homeowner business loan is the correct product for the client, their circumstances and business requirements, but with the product in their arsenal, a broker is even better equipped to serve both their existing and new clients and I urge them to fully acquaint themselves with the product.
- Limited or no equity in the portfolio
- Declined consent from the first mortgage lender
Capital raising for:
- Property expansion
- Business purposes
- Loans from £25,000
- Up to 75% LTV
- Rates from 0.95%
- AVMs (subject to confidence score)
- Free legals
- Non-standard construction properties accepted
By Maeve Ward, director of commercial operations at Mercantile Trust working in conjunction with Clever Lending.