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

Asset-Backed Recovery?

 

As SMEs and the broader economy enters a period of recovery from the pandemic, the importance of its assets to a business are in sharp focus:

·       Investment in assets facilitates growth

·       New assets help to meet the needs and changing demands of customers

·       Keep up with the volume of demand by increasing capacity with additional assets

·       Easy to quantify the economics of the investment in assets: Additional business generated – Cost of asset = Return On Investment

Asset Finance conserves cash in your business now, allowing you to budget for the months and years ahead.

There is now the additional incentive to invest in new assets from the Super Deduction tax relief scheme that the government announced in the budget – up to 130% of the cost of qualifying new assets in your business from 1^st April 2021 to 31^st March 2023 can be offset against the taxable profits of your business for Corporation Tax in that tax year.

Leasing Finance and Hire Purchase facilities are treated differently for tax purposes in your company’s accounts - I’d recommend discussing the best approach with your accountant, and government guidance on the Super Deduction scheme can be found here:

https://www.gov.uk/guidance/super-deduction

Some additional financial reasons for companies to use Asset Finance:

·       Frees up capital, tangible security and cash flow to be deployed for other purposes

·       Leasing Finance can avoid the issues of depreciation of the asset

Every Asset Finance lender will be comfortable with understanding and pricing different sectors or types of assets, which can broadly be split into Hard and Soft categories:

Hard Assets

Normally higher value assets, with longer retention of value:

·       Heavy goods vehicles, light goods vehicles, commercial vehicles and cars

·       Agricultural machinery

·       Construction machinery

·       Manufacturing machinery and plant

·       Recycling processing equipment

·       Printing presses

Soft Assets

Normally Leased and low residual values:

·       IT (Hardware and Software)

·       Audio visual

·       Furniture, fixtures and fittings

·       Security systems

·       EPOS (Electronic Point Of Sale) card terminals

For Asset Finance, expect an asset that holds a higher residual value to require a smaller deposit and minimal additional security, and vice-versa. 

Used Assets

Asset Finance can be used to purchase second-hand assets (for example, used vehicles or refurbished IT hardware); however criteria on age of the asset at the end of the finance term may apply, and the lender is likely to independently value the asset at the commencement of the facility.

Different assets, and a company’s situation, could determine the type of Asset Finance facility that would be suitable:

·       Leasing Finance: Your business doesn’t own the asset but agrees a lease usually for a fixed term and payments

·       Hire Purchase (HP): This allows your company to purchase an asset over an agreed term with agreed regular payments

·       Refinance: (or ‘Sale and Lease Back’) Your company may own assets that are either unencumbered or partially financed - lenders will fund your business against a proportion of this equity

·       Operating Lease: A specialised form of Leasing Finance where your company requires the asset for a specific term or project

·       Business Contract Hire (BCH): Exclusively used in the leasing of business vehicles, contract ‘options’ can include sourcing, maintenance and insurance 

Adding the new tax relief incentive to the already strong case for investing in assets for your business – growth potential and the ability to capitalise on new opportunities among others - should mean that your next step is to decide how best to fund the asset.

Make your company’s recovery Asset-Backed.

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk                      01636 614 014

The Super Deduction Corporation Tax Relief Scheme

 

Companies of all sizes can benefit from the Super Deduction – it could pay to invest in your company’s growth in the next two years.

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.

SMEs’ deposits rose 20% to £252bln in the pandemic; the Super-Deduction encourages businesses to spend, in turn driving economic activity and productivity.

•         Applies to all asset types, New and not Used
•        No limit on purchases
•        Cash, loans or Asset Finance purchases
•        Company cars not included
•        Claw back may apply to assets sold during the period

Example: Spend £50,000 on assets, offset 130% against taxable profits = £65,000

At 19% Corporation Tax rate = Tax Saving of £12,350

(£50,000 x 130%) x19% = £12,350

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?

Assets could drive growth in your business and the economy forward again.

Guidance: https://www.gov.uk/guidance/super-deduction#history

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk                    01636 614 014

Key Facts: The Recovery Loan Scheme

 

Launched: 6^th April 2021 for applications

Launched with 18 accredited lenders, expecting up to 100 lenders to participate

In summary the RLS is a funding solution “where finance is not available under a normal commercial basis”.

The scheme replaces the BBLS, CBILS and CLBILS schemes:

·     Term Loan funding starts at £25,001 up to 6 years
·        Invoice and Asset Finance starts at £1,000
·        Scheme limited to £10m per company, or £30m per group

Scheme is a “top up” to existing BBLS and CBILS loans – total amount that can be accessed under all schemes guided by:

•         2 x wage bill or 25% of Turnover for 2019 or justified 18 months cash flow requirements

For example, if ABC Ltd had turnover of £800,000 in 2019, then their maximum total Covid support schemes’ borrowing could be £200,000. If they had already accessed a CBILS loan for £100,000 then, subject to credit assessment, they may be eligible for £100,000 funding under the Recovery Loan Scheme.

Some scheme rules are the same:

• NO PG taken on loans up to £250k
• Borrowers private residence cannot be taken as security
• 80% Government guarantee to the lender

Some changes to the rules:

•          No interest free period for the borrower
•          The business responsible for all fees associated with the loan
•          No automatic payment holidays up front for all borrowers
•         No minimum turnover or time incorporated

Proposals will be considered for all sound business and economic reasons – every application to be fully credit assessed. 

Mark Grant, April 2021. 

info@fiduciacommercialsolutions.co.uk                 01636 614 014

Bridge To Let – One Step Across Two Conveyance Hurdles

 

It is very common now to see our landlord clients acquire property that requires conversion work – either commercial to residential or single dwelling to HMO – or refurbishment and modernisation to get it ‘tenant-ready’.

Beyond maximising rental yields, landlords are adding immediate capital value to their long term investments by completing this work after purchase.

The traditional and well trodden path for landlords through their limited company property vehicles (SPVs) can be broken down into two distinctly separate stages:

§  The purchase and conversion or refurbishment is funded via a Bridging Loan

§  On completion of the works, with the property now in a habitable state for tenants, a Buy To Let mortgage is put in place which refinances the Bridging Loan

Depending on the funds that the landlord has to put into the first stage, some Bridging lenders will only advance a Bridging Loan to acquire the property, while others can offer a ‘Refurbishment Bridge’ which can combine an advance on the purchase with a contribution to the ‘cost of works’ for conversion or refurbishment.

Our well trodden path has two separate conveyance stages, the first of which is when the property is purchased.

The landlord will provide a ‘schedule of works’ to illustrate what will happen once they acquire the property, to be considered alongside the valuation of the property in its current state.

The surveyor provides the Bridging lender and landlord with one valuation of the property in its current state, for purchase, and a second valuation estimating the value of the property with completed conversion or refurbishment work (the ‘Gross Development Value’).

The Bridging lender can then confirm the economic 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 their product.

As the landlord reaches the end of stage one, when the property is habitable by tenants following the completion of the conversion or refurbishment work, they refinance the Bridging Loan with a limited company Buy To Let mortgage.

These products can offer up to 75% LTV (subject to eligibility) and should clear the Bridging Loan plus funds returned towards the original purchase deposit and ‘cost of works’.

At this stage the client has added capital value to their investment, and likely enhanced their rental yield, but the fly in the ointment is that they need to go through a second conveyance stage in full at this point to secure their second and long term finance vehicle – the Buy To Let mortgage.

We recognise that every landlord and client are in a different position, and that having an option on whether to refinance or to sell at the point of completion of the conversion or refurbishment works may suit them.

Many others though are committed from the outset in the long term nature of the investment, and commonly complain about the time and cost of going through essentially a second purchase process on the one property – this represents an opportunity cost to them potentially as well as an additional financial cost.

Product innovation – the single conveyance in a ‘Bridge To Let’

Traditionally commercial finance is not an area associated with lenders adapting and innovating their product offerings based on client requirements and feedback – but the Buy To Let and property investor space is bucking that trend.

Cue the Bridge To Let offering, available now from several lenders and very likely to increase in popularity as landlords become aware of it.

In a nutshell, the landlord completes a single conveyance at the point that they purchase the property – a surveyor’s visit and solicitor’s work confirmed with dual underwritten offers of both the Bridging Loan for the conversion or refurbishment stage, and the subsequent Buy To Let mortgage, which the client rolls into once the works are completed.

The key here is that both finance facilities are arranged with the same lender up front, under a single application and conveyance process.

The lender would confirm completion of works, and the property being habitable for tenants, much in the same way that their agreed QS would sign off works completion during the project for staged payments – critically the completion of the works does not signal a second and separate application and conveyance stage.

§  A single lender providing dual offers at the start of the process – for both the Bridging Loan and the Buy To Let mortgage

§  Significant time saved and reduced costs from not having a second conveyance stage for the Buy To Let mortgage

§  Confidence of knowing your costs, with some lenders able to fix the rate of the Buy To Let mortgage at the initial dual offer stage

‘Time is money’ is particularly true for landlords if that time is between the property being habitable at the end of the completed works, and their longer term finance being in place through the Buy To Let mortgage – that time often being the second conveyance! 

We source the most suitable solutions for our clients’ requirements from our whole of market panel of lenders. By listening to the whole set of requirements we can identify the most suitable solution for our landlords – which could include Bridge To Let moving forward.

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk / 01636 614 014