The National Loan Guarantee Scheme is the latest offering from the Government to ease the Credit Crunch by encouraging lending to small and medium sizes business (SME,s) with turnover of less than £50m. A total of £50bn has been earmarked for the scheme to be lent to SME’s ove the next 2 years. Most of the high street banks have signed up to this scheme including Royal Bank of Scotland (mainly its NatWest arm), Lloyds, Barclays, Santander and the new specialist lender, Aldermore Bank.

Contrary to what people may think the Government is not lending its own money but only guaranteeing the loans made to the banks. This enables the banks to borrow from the money markets at a reduced rate as the loan is underwritten by the government. By borrowing at a reduced rate the bank is able to lend to SME’s at a rate generally 1% lower than would normally be available to them.

The banks are still responsible for their lending decisions and loans that default are the responsibility of the banks. This is the crux of the matter in that if a company was refused a loan before because the banks deemed the loan was too risky then nothings changed, the company will still be refused the loan. The only pressure on the banks to lend is the same as before under Project Merlin, which did not amount to much more loans being made. This is what the HM Treasury have to say about the National Loan Guarantee Scheme.

Why is there such a difference in terms and conditions? As with all bridging loans the rates and terms depend on the risk of the transaction. The more unique the property, the more the perceived risk of the transaction to the lender. Hence the rates will be higher and the LTV lower. However the type of property will also affect the terms and conditions of the loan, the more desirable the property the better the terms and conditions.

Also the use of the property will have an effect on the terms and conditions of the bridging loan. Public houses and hotels are not particularly popular in the current economic climate. Semi commercial properties in good locations can usually provide good security for bridging loans with the highest LTV’s available for commercial properties. Properties that are purely commercial can be hard to raise loans on, especially if they are empty or do not have tenants lined up for occupancy. Some commercial properties are virtually impossible to raise loans against such as churches or even ex churches, venues for adult entertainment, petrol stations and operating nursing homes.

As it can be seen getting a bridging loan offer on a commercial property is no easy matter and can prove a challenge to even the most experienced property professional. Fortunately for those with less experience commercial bridging loans can be sourced by using a specialist bridging loan broker. Here at Sunrise Commercial Finance our Senior Loan Consultants have years of experience arranging bridging loans for the most challenging cases.

When looking for a bridging loan many customers see rates advertised that are a lot lower than the rate in the terms they are offered, why is this?

As with any industry the Bridging Loans Sector is no different, these loans are available but to achieve them the customer has to meet a strict criteria and underwriting. These include and are not limited to the following; the size of the loan in relation to the value of the property (Loan to Value LTV), the location of the property, the customer’s credit history, the type of property offered as security, the exit rout and the financial standing of the customer.
Let us examine each one of these in detail:

Loan to Value (LTV)

This is the size of the loan expressed as a percentage of the property value. So a property worth £100,000 with a loan secured against it of £65,000 would have a LTV of 65%. However some lenders lend against the open market value whilst others lend against the 90 day value, or forced sale value, which tends to be less than the open market value. As bridging loans are priced with regard to risk the higher the LTV the higher the interest rate. So really low interest rates are offered to loans that are at a low LTV.

Location of the Property

Although your property may be your most treasured possession to a bridging lender it may represent a less than ideal security due to its quirkiness. This will mean that it will appeal to a small number of buyers should the property be repossessed and sold on at auction. Isolated properties and country houses are also deemed more risky than semidetached houses in the South East of England.

Borrowers Credit History

If your credit history is not good than you are considered more risky to lend to than someone whose credit history is good. Lenders are not making a moral judgement but basing their lending decisions on your ability to repay the loan. If you have poor credit history than there is little chance that you can refinance the loan with a main stream lender and your only option is the sale of the property. In today’s financial climate property sales are taking longer and longer.

The Type of Property Offered as Security

The best rates available for bridging loans are for residential single units, i.e. houses; commercial and semi commercial premises will be offered higher interest rates and lower LTVs than residential properties. If you are looking for a loan to purchase a pub or hotel than you have to take what is offered as you will not be spoilt for choice. Country houses and highly individual properties are also not favoured as their value cannot be related to comparable sales in the area. So valuers will exercise a great deal of conservatism when valuing the property.

The Exit Rout

Contrary to common knowledge bridging loan lenders do not want to repossess properties, they want to have the interest paid on time and the loan to be redeemed at the end of the term. Therefore the exit rout is extremely important. If it is not realistic then the lender either will not lend or increase the interest rate and lower the LTV.

The Financial Standing of the customer

Borrowers who have assets are considered better risks then ones that don’t. Some may consider this unfair but if you have your own property and are in danger of having it repossessed than it is thought you will try harder to repay the loan than if you are living in rented accommodation and have nothing to lose. Good financial standing also makes it easier to refinance the property should this be the exit rout.

Taking all of the above into consideration and the past four years of recession then it is not surprising that not many of us tick all the boxes to be offered the best headline rates. But they are available if you want to borrow a low LTV on a standard property in London or the South East of England.

What changed the banks minds? One thing was the amount of projects they had on their books that were in negative equity, why waste more money on schemes that will make a loss. These loans normally would have been foreclosed but if that happens then the loss has to be included in the accounts, whereas if they are left as they are they can be classed as an asset on the balance sheet. All of the banks have equity shares in house building companies, in fact according to the Sunday Times of 8th January 2012 Lloyds, with their acquisition of HBOS are now the fourth biggest house builder in the country only behind Barratt Homes, Persimmon and Taylor Wimpy.

This on top of the new banking regulation that requires banks to hold more capital and the current view that we are entering Credit Crunch Part 2 have dried up the loans banks are willing to lend. Fortunately there are some alternatives to the High Street Banks; niche private banks are still lending and so are Bridging Loan lenders. The rates that these lenders charge are a lot higher than that that was previously available from their banks but for the right project a decent return can still be generated for the developer. The developer has now to have “some skin in the game”, that is some of their own money invested in the scheme. However 100% build costs are still achievable with a contribution towards the cost of the purchase of the site. In some cases a joint venture could also be set up where the lender funds the whole development costs including land purchase and build costs the resulting profits are then shared 50-50 between the lender and the developer. Although for joint ventures the development has to be in a prime location in the Southeast.

Unfortunately with regards to the High Street Banks that old adage applies that they will only give you an umbrella when the sun is shining.

This brings us to China, whose growth figures for the third quarter of 2011 were 9.1% with a projection of around 8% for the economy in 2012. With these figures and the increase in inflation the outlook for China is not looking rosy. There is a speculative property bubble in the main cities and talks of loans that are held by local governments turning bad.

“China finds $84bn local government debt irregularities” with headlines like this on the BBC this is reminiscent of the events that happened in America pre crunch with talk of a soft property bubble landing. No cross contamination from subprime mortgages and the view that all subprime mortgages cannot fail at once. They said “this time it will be different”.

How will this affect the UK’s economy in 2012? Well, with no solution to the Euro crisis in sight and the chances of getting any agreement with 27 independent countries all looking after their own interests, economical as well as political it does not look good.

As one old communist leader said “this year will be worse than last year, but next year will be even worse than this year”

There is only so much pain the Greeks can put up with caused by cutting wages and cutting jobs. Also there is only so much German money Angela Merkal can persuade the German Government to pay out to the “profligate Greeks”.

The way out of the Euro Crisis, we are told is for cuts in wages and Government spending and a rise in private sector employment thus raising more revenue for the Government in taxation. However with every country in the European Union tackling their crises in the same way, with the backing of the IMF (International Monitory Fund), who is going to buy when all countries are trying to get out of the crises by increasing exports? Where is the buyer of last resort? It used to be us in Europe and the USA. Not anymore, and it will not be China as their economy is based on exporting goods not importing them in bulk from Europe.

However the Crisis is solved, either through the peripheral countries defaulting and leaving the Euro or by the crisis being continually deferred by kicked down the road there is going to be a lot of pain for all of us involved.

So do still go to Greece for your holidays but don’t book or change your Euros just yet. Even the Greeks do not riot during their summer holidays.

The answer to these questions is yes. We are entering a new period of being a nation of renters  as opposed to buying property, this is down to a number of reasons; the lack of mortgages to first time buyers and the amount of deposit required to purchase a property now that large loan to values are not effectively available. Also adding to the BTL boom is that the Government and Local Authorities are not building enough affordable housing and the scheme where developers had to provide affordable homes has hit the buffers as speculative building on large sites is at a record low. All of the above have contributed to the increase in rental income and the amount of people that are chasing suitable properties to rent. Adding to this is the increase in the numbers of lenders that have returned to the BTL mortgage market with over 400 products now available. Therefore with a suitable deposit it is easier to get a BTL mortgage than a residential mortgage.

If you are new to the BTL business and have limited funds it is still possible to build up a portfolio of properties with the minimum of funds. How is this legally possible you may ask in these straightened times? The answer is to use short term financing to purchase Below Market Value properties (BMV) at a discount, keep the property for 6 months and then refinance the property onto a BTL mortgage at the full market value. By doing this you can purchase a property with as little as 10% cash as a deposit and after 6 months when you refinance you can release your deposit with the remortgage funds. Effectively getting you back to where you started but now with the security of a property with approximately 30% equity built in.

Where can short term finance to facilitate property purchases be found? This type of funding is provided by niche lenders who are not generally available to the public. Although the costs can be higher than traditional lenders the rates reflect the speed of the transaction, lending based on open market value as opposed to the purchase price and that the lending is non-status requiring no proof of income. There are a relatively small number of providers of short term finance who all have different lending criteria. Only some lend on open market value and even less will fund 100% of the purchase price.

To guide you through this maze the best option is to use the services of a specialist broker with knowledge in this area. We at Sunrise Commercial Finance will lead you through the application from the first call to completion of the purchase and even assist in arranging refinance to a BTL mortgage.

The High Street Banks have decided that this type of lending is too risky for their current business model. Even loans for developments that are half complete are standing empty after agreed funding has been withdrawn. Where can these developers turn after being left high and dry by their banks? There are still private lenders willing to lend to new and part build schemes usually funding 100% of the build costs. For developers and builders that are fully demoralised and just want out of their half completed project there is the option of selling on the scheme to draw a line under their liability and move on.

Although interest rates are higher from private funders at least they are still lending and are more pragmatic in their lending decisions, basing the decisions on the quality of the scheme, profitability and experience of the developer. Some funders insist that the developer has hands on experience in carrying out similar projects, while others are not so prescriptive, and will accept suitable experienced and a qualified personnel carrying out the supervision on their behalf.

Loans from private funders are non status with no great weight being given to the developers credit history. However in order to repay the development loan once the project is complete, if the developers credit history is poor, then the only exit would be sale of the units as refinance would not be an option.

Are there any solutions for the hard pressed farmer? Fortunately yes, private finance is available to plug the gap left by the High Street Banks with short terms loans secured over farms and farm land. As these loans are non-status the income profile of the borrower is not such an issue as it is with the banks. However a realistic exit strategy has to be in place to repay the loan at the end of the term. Loans can be for up to 4 years and in some circumstances can be for longer. Interest rates are also flexible, generally from 1.25% but if the loan to value (LTV) is low then the interest rate can also be lower. These short term loans are generally on a first charge basis but can be on a second charge basis if there is enough equity in the property or land. However second charge lending is at a higher rate than first charge loans and the LTVs may not be as high.

Short Term Finance Loans are very fast to arrange with most loans available to draw down within 10 working days. Interest payments can be rolled up and settled when the loan is redeemed; this is dependent upon there being sufficient equity in the property. Loans can be used for any legal purpose and as the loan is secured on property there will be no need for elaborate business plans or lengthy descriptions about the use of funds.

Some of the panel of our Short Term Asset lenders have introduced a new product, a Flexible Business Loan, which will provide an alternative to credit cards and overdrafts. Although the interest rates are similar to overdrafts and credit cards the facility is more flexible and simple to understand. The loans are pre agreed and secured on company assets up to an agreed figure.

Key Points of The Business Flexi Loan

• For small businesses, partnerships, corporates and LLPs.
• Maximum Term: – 12 months with automatic renewal subject to the facility being operated satisfactorily
• Amount: From £26,000 to £100,000
• Security required, 1^st or 2^nd charges accepted and other assets considered
• Up to 70% LTV
• Interest Rate: Between 2.5% to 3% per month
• 1.5% set up fee with a minimum of £500
• Draw down and repayment in multiples of £1,000 subject to 2 days notice
• In principle decision within 48 hours
• No End or Early Redemption Fees
• Interest only charged on outstanding balances
• Assists businesses with seasonal cash flow requirements

So instead of wasting your time with unresponsive banks why not try our Business Flexi Loan. Easy to understand and no need for elaborate business plans as the loans are secured on assets. The Business Flexi Loan is especially suitable for businesses whose cash flow fluctuates over the year or where upfront costs are necessary to procure materials with a long lead time before sales.

So don’t just sit there waiting for the bank to get back to you, call us now for more information or a quote.