Recovery and Growth by Payment Terms?

 

As you move into a period where Government backed support is passing into the rear view mirror, and you are guiding your business through this recovery period in the economy – what will allow you to operate and grow from here?

If you provide payment terms to your customers then you could be operating in some senses by watching the calendar for when your invoices are settled.

Cash flow or working capital, however you want to term it, is what allows your business to operate, trade and essentially exist. That sounds like an over simplistic statement, but the reason why companies use cash flow forecasts is to stay one step ahead in ensuring the flow of cash in their business.

Cash flow provides for a wide range of purposes such as wages, fixed overhead costs, paying suppliers and increasing or diversifying your activities as business conditions dictate – or opportunities present themselves. When cash flow dries up, your trading activities can cease up, and this can prove terminal.

Even if your company has not been directly impacted by the pandemic, and suffered lower sales, productivity or even a forced closure, it is highly likely that through your supply chain, staff or customers you will have felt the effects in your cash flow; virtually no business has remained directly or indirectly unaffected.

Invoice Finance may not be the most suitable product for every part of the economic cycle – but think of it another way: what other financial facility will pay you for most of the work that you have completed just a few days after you have completed it, when your customers won’t be settling anything with you for another 30, 60 or 90 days?

We see this as the clearest demonstration of the ends justifying the cost of the means – many businesses won’t be able to manage without these facilities in the coming economic climate – and we consider Invoice Finance will likely be one of the best cash flow conservation tools available to companies.

·        It’s flexible and can adapt to most sectors and business models; it fits with business conditions and turnover, unlike the rigid structure of a business loan.

·        Your company will need continued support to ensure that waiting for invoices to be settled doesn’t limit your activities – or your ambition.

If your company has an Invoice Finance facility in place you might be wondering how we could help you. You may be able to benefit from an improved funding rate or lower costs? As you would do in your personal finances, it pays to look for alternatives that may be more suitable and/or offer you improved terms.

Please Ask Yourself This Question:

As you approach and plan for the next 12-24 months, is it likely that you will ALWAYS have the cash flow necessary to meet wage bills, pay suppliers, or grow your activities, without the certainty of knowing that when you issue an invoice you will get funded almost immediately?

As you drive your business forward from here leave the calendar in the rear view mirror; Invoice Finance allows you to fund both outgoings and opportunities with the business that you are already doing, and without depleting your cash flow.

Why not talk to us about how Invoice Finance can benefit your business?

Mark Grant, June 2021.

info@fiduciacommercialsolutions.co.uk  / 01636 614 014

Cost Of Works

 

In the current residential property market conditions – a year of price growth, with some areas still rising – an increasing trend that we are seeing with property investor and landlord clients is the purchase of property that either requires refurbishment work, or conversion from commercial to residential use.

Through the identification of a property investment opportunity, and subsequent refurbishment or conversion to the property being in a lettable or saleable condition, the client is able to unlock an immediate capital appreciation in the value of the property.

Landlords immediately add capital value to their long-term investments before refinancing the initial short term financing with a Buy-To-Let or HMO product, as well as maximising rental yields.

Property investors can sell, or ‘flip’, the completed property, releasing their equity and profit to invest into the next property project.

I wanted to look here at that initial short term funding that could be used to both acquire and refurbish or convert the property – including the ‘cost of works’.

Some lenders only advance day one purchase funds with a Bridging Loan, others offer a ‘Refurbishment Bridge’ where a loan for purchase is combined with a contribution to the ‘cost of works’.

At the point when the property is valued for purchase, the surveyor is also provided with a ‘schedule of works’ that are to be carried out, and they provide the lender and client a second valuation estimating the value of the property with completed refurbishment work (the ‘Gross Development Value’).

This allows the lender to determine the overall viability of the project, as well as the amount of the ‘cost of works’ that they would be willing to lend, if that was a part of the product.

I want to set out a Case Study based on a conversion from commercial to residential, where the footprint of the property was not going to change; the conversion included the internal division of the property, replacement of doors and windows, new kitchens and bathrooms and all supporting internal works. Externally there was some groundwork to create more car parking space and landscaping. 

The property already had planning permission for the conversion (it had originally been constructed as residential and later converted to commercial use), and planning status is something that you need to be clear about with lenders – lenders dislike what they term “planning risk”, where they fund a deal based on planning that hasn’t been granted yet.

This client had experience at refurbishments and conversions – and the fact that some lenders only accept experience is something to remember. But many will accept you using a contractor that can evidence the successful completion of other similar projects – and the contractor will be used to this sort of request from other clients’ lenders I am sure.

Not included in the case study is the interest rate detail, as this is linked to an individual applicant and the property details as evaluated by the lender’s credit team.

Case Study

o   Client acquired an office and car park behind with planning for conversion into 4 x 2 bed flats

o   Purchase price £355,000 and a maximum day one 70% Loan To Value (LTV)

o   The refurbishment bridge was taken over 12 months

o   6 months interest was retained on day one, and the second six months was serviced monthly

o   At the time of the purchase, the surveyor valued the Gross Development Value (GDV) at between £840,000-£900,000 (£210k-£225k per flat) – the lender set their maximum lend to the client off the lower end of the scale at £840,000

o   Cost of works was estimated by the client at £200,000, in staged payments as works were completed, any costs beyond this the client would self-fund

Purchase Price	£355,000
Lender Day One maximum LTV	70%
Lender Day One maximum loan	£248,500
Client Purchase Deposit	£106,500
Gross Development Value (GDV)	£840,000
Lender maximum Loan To Gross Development Value (LTDGDV)	65%
Lender maximum LTDGDV	£546,000
Day One purchase loan	£248,500
Cost of Works (est.)	£200,000
*To be added: Fees and Retained Interest
Total Bridging Loan	£448,500
Total LTGDV	53.4%

*To be added in before the calculation of the total bridging loan: the product arrangement fees and the retained interest element

**Additional costs, including but not limited to, valuation survey, client’s own legal fees, lender’s legal fees, stamp duty (if applicable), any further serviced interest payments and any ‘contingency’ refurbishment costs, need to be budgeted for by the client

The additional costs detailed will slightly increase the client’s LTGDV, but it will comfortably sit below the lender’s maximum threshold, and therefore in this case was an interesting one for the lender.

At the point at which the works are completed, the client completes their ‘exit’ from the Bridging Loan and puts in place limited company Buy-To-Let mortgages. This can be available up to 75% LTV (subject to eligibility) and should clear the Bridging Loan plus funds back for the client’s original purchase deposit and refurbishment costs.

The client now retains equity in a much improved investment property, with an enhanced rental yield.

Not every deal is going to result in the same profit margins for the property investor or landlord – but if the economics of the deal make sense for you to do, then you can probably find support from a Bridging lender to include some or all of the ‘cost of works’ in their product.

We are helping property investor and landlord clients unlock capital value and maximise long term returns with up front work to property – why not see how we can help you?

Mark Grant, May 2021.

info@fiduciacommercialsolutions.co.uk / 01636 614 014

Personal Finance Logic in Commercial Property Finance?

 

We have seen a lot more of it in all types of commercial finance proposals. Is it a change in mindset generally?

Have business owners realised that they weren’t applying the same thought process to their company’s finances as they were to their personal money?

Or as one business owner-manager said to me, he has had a lot more time over the last year to look at the issues he never normally has time for.

Whatever has brought us to this change in mindset, it’s a positive.

Businesses save money and are better prepared for the future when they have reviewed their finances, identified cost saving opportunities, forecast their future cash flows and planned steps that they can take to improve their finances for the long term.

All of this sounds very similar to the budgeting and planning that we do in our personal finances. And an increasingly frequent request that we are hearing from clients is that they want to buy either their existing commercial premises that they are currently leasing, or if that is not available then an alternative premises.

Whether they are currently paying £16,000 or £60,000 to their landlord, the comment from them is the same – we worked out that we would just be better off owning our own space than paying all that rent. Something I said myself before buying my first property!

An ‘Owner Occupier’ commercial mortgage can be used in a number of circumstances:

•  A company wants to purchase the commercial premises from which they already operate
• To buy a new or additional commercial premises to operate from
• The purchase of a new business which includes a freehold commercial property
• To re-mortgage their commercial property from their existing mortgage provider

We are always asked very early in the conversation about the level of deposit that would be required for a new ‘Owner Occupier’ commercial mortgage – and we have to set expectations according to the prevailing climate; while the commercial lending market is still in Recovery mode from the pandemic to some degree – it is very much open for business!

A high level answer would be to expect to be asked for 30% - 40% deposit for this type of mortgage, and the 30% level is something that lenders have only recently decreased to again as the economy started to open more fully again from Covid restrictions.

It is always worth our covering this point early with the client – we are all bombarded with the high LTVs applied in the residential property market, and we talk to people expecting 90% mortgages on commercial properties on a daily basis.

There is a high level fact find that we will do with a business to allow us to determine whether lender/s will support a proposal in principal, and source indicative terms. This would currently include:

•        Details of the property
•        The business’s financial performance over the last 2-3 years
•        Current lease/rental payment details
•        Summary of Covid impact on trading
•        Existing commercial debt in the business

Assessing your case thoroughly at this initial stage means that we have a far greater chance of indicating realistically achievable terms for your requirements. We don’t just quote you the best rates and terms available to anyone, and hope that we can find someone to support them for you later!

Every lender has their own variance of affordability calculations – but if you can comfortably afford the repayment structure within your existing rent/lease payments then that is a good place to start to think that you could potentially afford a commercial mortgage payment.

We enjoy working with clients on ‘Owner Occupier’ commercial mortgage cases as it feels like we are helping them to take a leap forward in their company’s finances. Every day I hear the description of rent payments being ‘dead money’ when business owners discuss the opportunity of owning their own premises.

 

Why not get in touch with us to discuss your property ownership aspirations, and join the ranks of business owners that have these aspirations for their company as well as their family?

Mark Grant, May 2021.

info@fiduciacommercialsolutions.co.uk  / 01636 614 014

Fiducia’s Guide to Commercial Finance

 

Fiducia Commercial Solutions can source a wide range of commercial finance options for your company in products under headings like Commercial Property, Investment Property, Development Finance and Business Finance – but what does that mean in practice?

Gone are the days of approaching your bank (as your only option) and choosing from the menu items of: Overdraft – Loan – Mortgage.

To source the best outcome for your requirements, and a suitable solution for you, we use a whole of market panel of lenders:

§  High Street Banks

§  Challenger Banks

§  Product Specialist Lenders

§  Peer To Peer

§  Fintech

Some of our lenders you may not have heard of, some only deal with commercial brokers and some of their products and rates are exclusive to the commercial broker channel.

So back to my first question: What does this mean in practice for your business? When you approach us for a business loan to manage cash flow, we will talk through your requirements and the issues you are looking to resolve; and if we identify that your cash flow issues stem from, for example, payment up front to your suppliers, then we may put an option alongside the loan in supply chain finance for you to consider.

We don’t just have a list of products that are available – we work with you to suggest suitable options for your business.

This is a guide to the commercial finance solutions that Fiducia can access for clients – we can of course go into more detail when talking through their suitability for your business, and your eligibility for the lenders’ criteria.

Many can be used to manage and conserve cash flow, and to help you trade out of the current environment or manage demand in ways that you may not have previously thought about.

Commercial Mortgages

Commercial Mortgages are used to fund the purchase, or refinance of, commercial and semi-commercial properties. In general terms, there are 2 types of Commercial Mortgages:

§  Owner Occupied - The purchase or refinance of the property where the company is currently operating, or the purchase of a new property to move to and operate from.

§  Commercial Investment - The purchase or refinance of commercial or semi-commercial property which will be rented to another company to operate from – essentially a commercial Buy To Let.

RESIDENTIAL INVESTMENT / BUY TO LET

An investor may purchase, via a limited company (“Special Purpose Vehicle” or SPV), an investment property as part of a long-term investment strategy. These range from a single property to building a portfolio of properties.

Bridging Finance

Short-term property finance with faster completion compared to traditional mortgage finance; the ‘Exit’ from the loan is commonly the sale of the asset, or long-term re-financing.

Multiple uses: auction purchases / requirement to purchase quickly / refurbishment and development periods / releasing equity to raise working capital.

Development Finance

Finance terms available vary according to the initial value of the property / land, the costs and fees of the development work, the projected value of the completed development and your previous experience of development. Variants include:

§  Light Refurbishment - Cosmetic refurbishment with no structural changes.

§  Heavy Refurbishment - Contains cosmetic work, but usually renovation work including structural changes or changes to the footprint of the property.

§  Ground Up Development - Commonly starts from vacant land, can include demolition and rebuild projects.

Recovery Loan Scheme

Open For Applications April 6th - December 31st 2021.

The scheme replaces the government's original business support loan schemes - Bounce Back Loans, CBILS and CLBILS - which all closed their doors to new applications on March 31st.

•   Term Loan funding starts at £25,001, up to 6 year terms
•    Invoice and Asset Finance starts at £1,000

The scheme is limited to £10m per company, or £30m per group.

Business Loans

·        Secured Loans - The lender takes a guarantee to back the loan, which is normally a tangible asset that a company owns like property, machinery or vehicles.

·        Unsecured Loans - With no tangible security backing the loan, these are riskier for lenders – and this is normally reflected in a shorter term and higher interest rate.

·        Revolving Credit - Similar to an overdraft, you agree a facility limit and term and can ‘dip in and out’ depending on your needs. You only pay interest on the funds that you draw down.

·        Merchant Cash Advance (MCA) - Using the regular income from Debit / Credit Card transactions to help fund business borrowing, helping to smooth income in seasonal markets. No fixed loan repayments, your repayments are tied to the volume of business you take through card transactions.

·        Short Term VAT Loans - Lenders offer 12 week loans to help to settle some or all of your VAT bill – you can repay weekly or monthly.

Invoice Finance

·        Invoice Discounting - The simplest form of invoice finance. You keep charge of credit control, and get paid up to 90% of your invoice’s value on the day that you issue it to your customer, with the balance when they settle.

·        Invoice Factoring – As per Invoice Discounting, plus the lender manages your credit control - this can free up your time to get on with running the business.

·        Selective  - You select either the clients or the individual invoices to put into invoice finance, so you only use the facility when your cash flow requires it.

·        Specialist Sector?  - Construction Finance, Recruitment Finance and Professional Services Finance are just a few examples of specialist products that could be tailor made for your sector.

Trade / Supply Chain Finance

Trade / Supply Chain Finance is a revolving facility that can be with UK based suppliers and manufacturers as well as overseas, is flexible to accommodate deposits if required on order and other costs including import VAT and freight if these are applicable to you. And if it is from overseas, then lenders are also commonly experts in FX as well.

Asset Finance / Vehicle Leasing

Asset Finance gives your business access to the machinery, plant, equipment or vehicles that it needs to operate, without the full initial outlay of their cost. It can also release value from assets that you already own towards working capital and cash flow requirements:

·        Leasing Finance - Your business doesn’t own the asset but agrees a lease usually for a fixed term and payments. You are in effect renting the asset.

·        Hire Purchase (HP) - This allows your company to purchase an asset over an agreed term with agreed regular payments – the asset is yours when all of the agreed payments have been made.

·        Refinance - In simple terms, your company may own assets that are either unencumbered or partially financed. Lenders will commonly lend up to 70% of their current value less any outstanding finance.

From April 1 2021 for 2 years companies can offset 130% of qualifying spending on plant and machinery against their taxable profit in that first year under the Super Deduction tax relief scheme. Take your accountant’s advice for your business, but it could be worthwhile re-considering plans that had been shelved during the pandemic, or bringing forward plans?

We are sourcing suitable solutions to help clients achieve the best outcome for their requirements – why not see what options are available to you?

Mark Grant, May 2021.

info@fiduciacommercialsolutions.co.uk / 01636 614 014

Conserve Cash Flow To Ensure Your Recovery Is ‘Irreversible’

 

Most businesses, as well as the broader economy, have entered the ‘recovery’ stage from the pandemic. As restrictions are ‘slowly and irreversibly’ lifted, so business and cash can flow back around our economy again.

Cash flow conservation is nothing new; there are standard business practices such as chasing your receivables, negotiating your payables, cost cutting to your business overheads.

But making sure that the recovery in your business is ‘irreversible’, and that you are on solid foundations for the long term, you should preserve a level of cash within the business as a buffer against the speed of the recovery – and it not being in a straight line!

So what help is there to conserve cash in your business while you still have overheads to pay, outstanding customer receivables and business expenses in relation to re-opening and/or increasing your activity as demand is restored or increases?

For many businesses it will be a case of finding out what is available to them in terms of finance products and providers – gone are the days of your choices just being Loan – Overdraft – Mortgage, and the only place to get them being your bank.

We’re conscious that many businesses have always managed without the need for finance and this might be viewed as a last resort for them; but we look to offer options where they can envisage their cash flow not being strained, or worse.

Cash flow is the lifeblood of a business, and having a sufficient level so that you can restore your activities, meet demand and grow again is worth sacrificing a small amount of margin to cover the cost of funding your business.

As you forecast your cash flow, factor in the tools that can conserve cash flow; these tools will protect you from onerous and large cash calls on the business, and regulate the flow of cash to manage the balance between receivables and costs.

Invoice Finance – Use current business to fund the cost of doing it.

Invoice Finance pays you for most of the work that you have completed just a few days after you have completed it, when your customers won’t be settling anything with you for another 60 to 90 days.

You have the costs of wages, contractors, overheads and suppliers to meet – and with the immediate cash flow that Invoice Finance offers you can meet these costs, as well as be in a position to accept and carry out further work and opportunities that are available to you.

Think of it another way - the ends justify the cost of the means. Fit this scenario to your business and without the funding help how long until your cash flow will be strained?

Supply Chain and Trade Finance

Your company may buy raw materials that you manufacture or assemble to create finished and saleable goods, or purchase ‘finished goods’ from a manufacturer or supplier.

Supply Chain and Trade Finance can be within the UK as well as overseas – having a facility can improve prices and terms, and allow you to trade with manufacturers or suppliers that ask for pro-forma payment (up front) without a large cash call on the business well in advance of any payment you will receive from your customer.

Multiple clients report delays in being able to source materials and goods currently – extending the timeframe that their cash flow is strained where they do not fund their supply chain.

This ultimately leaves your cash flow, and company, exposed and vulnerable to further cash calls on the business. Sorry to repeat myself, but the ends do justify the cost of the means in so many cases.

Short Term VAT Loans

One quarter’s VAT bill from March – June 2020 was deferred to March 2021 under the pandemic HMRC scheme, and instead of paying one lump sum in March 2021, you could spread the cost of that deferred tax bill over the 2021/22 tax year.

HMRC acknowledged the importance of cash flow conservation in your business in relation to that one quarter’s bill, but what about every subsequent quarterly VAT bill that you face?

We work with funders offering 12-week loans to help to settle some or all of your VAT bill that can be repaid weekly or monthly.

If you face a tax bill that would drain the liquidity that you have available, this could leave you exposed in the event of any further cash calls. This option maintains cash flow in your business while meeting the HMRC demands in a timely fashion.

Assets can drive growth – Asset Finance over Cash Purchases?

Investing in assets for your business is very topical at the moment, beyond the potential for growth that they provide to your business is the government’s Super Deduction scheme – a Corporation Tax Relief scheme running until March 2023, and offering you 130% relief again qualifying asset purchases.

The subject of tax relief and suitability of different types of asset finance for your business are best confirmed with your accountant – but we can identify a clear benefit in not using cash currently to make asset investments if that could potentially leave your cash flow strained. And using asset finance still qualifies you for the tax relief scheme that I mentioned.

Asset finance allows you to budget the cost of investing in an asset against the growth that it can help to facilitate – with funding commonly available from 3 to 7 years (or longer). You will pay for the asset over time, out of income that is being generated from use of the asset, so avoiding a large initial cash outlay and your cash flow being strained until further receivables help you to recoup the situation.

Leverage your existing assets - Asset Refinance

‘Leverage’ far from the sense of some risky financial product gamble that we hear the investment banker ‘casino’ traders taking!

In your business you could have property, hard assets or stock that is unencumbered or with significant equity that you can leverage to generate cash flow for your business.

Depending on the asset, we work with a range of lenders in commercial mortgages, hard asset refinance, stock finance and secured lending that help clients access cash flow currently locked up in the existing assets of the business.

Our lending partners have innovated and adapted products to better suit clients’ requirements and you can, for example, access ‘business credit facilities’ (like a business overdraft) with the backing of property assets. The borrower only pays for what they borrow, for the time that they are borrowing it.

Every business is different – the degree that it needs to recover and the position from which it starts to do that. We understand that to make your recovery ‘irreversible’ you need to conserve cash flow.

We are sourcing suitable solutions for clients to help them recover, meet demand and grow – why not see what options are available to you?

 

Mark Grant, May 2021.

info@fiduciacommercialsolutions.co.uk                       01636 614 014