The Best Case Scenario
With the UK officially in recession, following a fall in output for the 3rd quarter in a row, many businesses are finding it difficult to borrow and lenders are finding it difficult to lend. What that means is that it’s even more important that you and your business research the best lender for your purpose and get your approach right, first time, when you want to borrow money.
Over the next three weeks, with the help of our commercial finance team, we’re going to tell the story of a real-life commercial financing case study. All names have been changed to protect client confidentiality, but we’ve kept the key facts the same. So if you’ve ever wondered what happens when you apply for commercial financing, this is your chance to find out, and it might even give you an better chance of success when you make your own application.
We’ll take you through the clients’ initial application, the preparation for the case and finally, the outcome. Along the way, we’ll also clear up a few misconceptions, point out potential pitfalls and answer some frequently asked questions.
And now to the case…
Our clients first approached us to ask if we could find them funding for a business purchase. They wanted to buy a long-established hotel which had slowly been reducing its trading as the current owners wanted to retire. This was a first time venture into the industry for our clients, but they were confident about their application, particularly because they had security for the borrowing.
Which leads us to probably one of the most widespread misconceptions about commercial financing; that all you need to take out a commercial loan is the right amount of security. That’s not the case. Lenders will also prefer you to have previous industry sector skills, or at least, transferable skills and good credentials. All lenders will also want to make sure your business can pay back what you borrow.
In this case, we knew that lenders would also expect the business to have trading figures for at least the last 2 to 3 years showing a sufficient profit to cover the borrowing.
After the first contact with our clients, our next step was to go into more detail with them about their circumstances and plans. We needed to establish answers to the questions raised above and at the same time understand how our clients’ personal life style would impact on the business. The reason for this is that lenders have a duty to positively identify any prospective customer and need to see evidence of good conduct in financial affairs. We also needed to know more about the business itself.
In this case, the business had been slowly run down due to the former owners heading for retirement and the profits didn’t support the borrowing required. Our clients therefore needed to prepare projections that would demonstrate how they would improve trade to such a level that it could support their borrowing.
We also needed to find out how our clients’ existing skills and work experience could be of benefit to them, seeing as they had no prior hotel industry experience.
In their favour, the amount our clients wanted to borrow – 60% of the purchase price – was within most lenders’ Loan to Value range. If you’re not familiar with the term ‘Loan to Value’ (or LTV as it’s usually shortened to), it means the amount of the loan compared to the value of the property it’s being secured against, usually described as a percentage.
Once our clients had answered our questions, we built up a clear picture of their aims and were ready to present their case to a potential lender. With our knowledge of the finance marketplace we had a number of solutions in mind to raise the finance necessary to complete the purchase of the business.
Find out what happened next in part 2!
For a free consultation about commercial financing, call Jeff Lenihan or Rebecca Bendle on 0845 230 9876 or e-mail email@example.com
Your business assets may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it.