IN ASSOCIATION WITH SHOOSMITHS

 

Post recession, high street lenders have possibly become more risk averse when dealing with SMEs in their search for development finance. However, new lenders focused on the SME market have been quick to fill the funding and investment gap. Indeed, the House of Commons SME Treasury Committee SME Finance (2018) reported that over fifty new lending licences have been issued over the past decade.

On first reading, that’s great news for SME property development businesses, looking to secure capital for opportunistic development purchases, refurbishment works or simply to assist with cash flow shortages affecting the daily running of their business.  With so many funding options now available, it can pay to know the key advantages of alternative and high street secured lending, before deciding which option is best for the borrower and their SME business.

Some key advantages of applying to an alternative lender for a loan include:

  • Short terms: typically three to 12 months.
  • Access to funds in one to three weeks. Note, the timescale for a property related loan will be affected by the availability of paperwork, such as a valuation report.
  • The potential option to have interest serviced monthly or the flexibility of it being rolled and repaid at the end of the loan term.
  • No hidden costs: alternative lenders claim to provide complete transparency on the fees they charge.
  • Speed of decision-making: these lenders aren’t bound by the same degree of red tape as the clearing banks.
  • Subject to the consent of the priority debt holder, a bridging lender will look at taking a second charge over property at 60-85% loan to value (LTV).

However, borrowers who opt for an alternative lender approach should look at the financial viability of the overall security package on offer. This includes upfront costs, exit fees and the potentially extensive security requirements of the lender.

Of course, some companies may prefer to do business with a traditional high street bank. Key advantages include:

  • Potentially better interest rates.
  • Typically longer loan terms, enabling the borrower to spread the cost of smaller repayments and to free up more cash.
  • The reassurance of accessing a branch, that’s part of an institution with a national/international presence, for a face-to-face discussion about borrowing needs
  • Rigorous credit assessment and risk profiling processes. This could mean the offer of a less onerous overall security package in comparison to alternative lenders.

However, high street lenders may prove challenging for some businesses, particularly if statutory compliance documentation, such as an asbestos report, isn’t readily available or there is a pressing need for the borrower to access finance.

Clearly, there is no one size fits all for the financial needs of a business. The flexibility in the market place should be encouraging and gives business owners the tools to make quick and agile decisions about their companies.

Another approach in today’s time-pressed market is to approach a broker who can help put together bespoke deals. Their contacts in the market mean that they also have access to a range of deals across the board.  Equally, brokers can speed up the negotiation process with a new or existing lender, such as helping to extend the facility on an existing agreement, dispensing with certain lending requirements or to negotiate the likes of lower arrangement/exit fees.   

The bottom line is that for commercial property businesses seeking finance, it pays to fully consider their options.

Collette Gibson is an associate in the real estate team of Shoosmiths in Glasgow. Collette is hosting the Royal Institution of Chartered Surveyors (RICS) Property Finance and Investment Appraisal seminar in Glasgow on 18th February.