Sources for Commercial Funding

There are essentially three types of finance source available to assist in business purchase finance and/or development. These are the Clearing Banks (Barclays, NatWest, HSBC, etc.), the Finance Houses/Centralized Bank, and finally the Building Societies.

Repayment Periods:

Banks and Finance Houses expect repayment in 10/15/20 years on freeholds with Building Societies being prepared to consider up to 25 years. Leasehold loans are usually available only from Banks and are also usually restricted to a maximum of 10 years or two thirds of the unexpired period of the lease.

Once again, these vary enormously with Banks charging from 1.5% above their base rate, Finance Houses from 2.5% above their base rate and Building Societies usually requiring an extra 1% or 2% above their normal 'house mortgage' rate. Each case is treated on its merits and you are likely to be offered a much more attractive rate if you are not seeking either a maximum loan and/or the maximum repayment period.

Percentage Advances:

These vary from source to source and at the moment, where the business being purchased is the only security being offered, freehold loans can be considered usually up to an absolute maximum of 100% of the bricks and mortar value, subject to repay-ability. We do have lenders that will alternatively lend up to a maximum of 70% of the purchase price (bricks and mortar, goodwill and fixtures and fittings), excluding stock, regardless of the freehold value; and other lenders that will lend up to 75% or even 80% of the total purchase price, excluding stock, so long as it does not exceed 100% of the bricks and mortar value. The ability to repay the loan is, of course, essential.

Leasehold loans are normally restricted to an absolute maximum of 60% of the purchase price (excluding stock). Leasehold property should have accommodation for such percentages to be considered. If the premises have no living accommodation (known as 'lock up'), the maximum advance is likely to be 50% of the purchase price; only a few sources are prepared to consider advances on 'lock up' businesses.

100% loans are possible, however, with additional 'outside security' (see below).

Outside Security and Income:

The availability of outside security can increase lending beyond the parameters outlined but the additional security being offered must be considered adequate. Each loan must be repayable from the profits generated by the business and not be reliant on the outside income, the latter being considered only as a bonus.

Structured Loans and Overdrafts:

Your total requirement must be considered very carefully on the basis that it may be prudent to organise only a percentage of the total requirement on a structured loan basis (i.e. subject to regular monthly repayments) with the balance then being provided by way of an overdraft.

Attitudes vary, but you should really only allow sufficient overdraft within your funding that can be adequately repaid within a 3 to 6 month period. Overdrafts that persist beyond this period of time should really have been included in the structured lending. Great care should therefore be exercised in your choice of arrangements.