11: A to Z of Raising Commercial Finance - I

Please note: with the market changing so quickly due to the current Covid-19 Pandemic, the content could be out of date at the time of listening.

Email - michael@thepropertyfinanceguy.co.uk

Telephone - 07951 802602

https://www.facebook.com/thepropertyfinanceguy/

www.thepropertyfinanceguy.co.uk

Please email me any questions, that you may have, and I will endeavour to answer them on the next podcast. Please also let me know if there is anyone that you would like me to interview, or if you would like to be interviewed yourself on the podcast.

These podcasts are not to be used in place of financial advice. You must take independent financial advice from a qualified independent financial advisor. These podcasts are for information purposes only

Specifically in this section, I am going to be dealing with how lenders actually deal with theinterest when borrowing fromthem. I will be dealing withBridging Loans and Development Finance(we all know how the interest on Mortgages are dealt with!)

When taking a Bridging Loan or Development Finance, the lender will deal with the interest in one of three ways.

The first way is that they retain the interest for the term of the loan. What this means, is they keep all the interest for the term of the loan aside at the beginning, so that they are essentially paying themselves their interest back, before you have even taken the loan.

You will often see a Lender offer a ‘Gross’ facility, which they then take the interest and the fees off of, and then whatever is remaining becomes the ‘Net’ facility.

You can see in this example that you have a gross facility of £75,000, which when you take away the interest and fees, becomes £64,500. You can see that they have retained the full 12 months of interest upfront, which has accounted for £9,000 of the reduction. They have also retained the arrangement fee upfront, which accounts for the other £1,500.

By retaining the interest in this way, the Purchaser requires more than the usual 25% deposit, they actually need 37% plus their soft costs. This can make a huge difference when you are looking at your deals, so ensure you have budgeted this in correctly.

When looking at Development Finance on a retained interest basis, the Lenders will look at your build schedule to work out where you will be taking tranches down. This build schedule will often be prepared by the Contractor and may come in the form of a Gantt Chart. The Contractor will prepare this as they know when the trades are going to be coming onto the site and when they are going to be invoicing you for the works.

The Development Lender will often split their loans into two parts, and then charge the interest on these parts separately.

The first part of the development loan is the day one advance. This often works in the same way as a bridging loan and is very similar to the example above. They offer a % LTV Day one as a gross facility and they then deduct the interest on this section to create the net loan (i.e. the amount released to the solicitor towards the purchase).

The second part is the development facility. This is the section that is released in tranches to allow you to carry out the build. The Lender charges interest on this as you draw it down. Some Lenders may charge you on a daily basis, some may charge you on a monthly basis. If they charge you on a monthly basis, it means that they will charge you a full month of interest, even if you have only had that tranche for a few days of the month. Again, keep this in mind as it can have an effect on the interest that you may end up paying.