Funding (part 2)

Moving on from Bootstrapping and Friends & Family options lets now look into the world of Commercial lending and recognised financial providers…

Commercial Loans

In many cases loans is the way which is applied to many businesses. Loans and private Investors are probably the most ancient almost archaic approaches to funding your idea. Since the set up of official currencies and establishment of “treasuries,” people have been approaching wealth-storing individuals or organizations for a share of the percentage of their wealth, necessary to bring their own idea to life, usually offering something worthwhile in return to the funder.

The sheer volume of sources exists nowadays with an open access to banks, building societies, grants companies, funding circles, etc. The way it works is simple – you approach one (or more) of these sources, presenting them your idea and justifying your request.

Be it purchasing equipment, starting costs of hiring an office, the ongoing staff-commitments, bulk-buy of core products, or pre-payment on your manufacturing order or whatever. You will be encouraged by sane people to go to the high-street bank.

Please do remember, there are big differences between the high street bank and the digital bank and the loan shark.

You are by all means will be offered a better rate and sexy terms by the loan-shark or the digital bank which does not have a branch. Most of the time it is because these organizations do not incur the same level of costs for licensing, auditing, management, and staffing, in fact they might not have it at all as they might be offering financial products and not be regulated by the government or a third party, essentially leaving you exposed to risk.

Trust my word – the better the offer the more likely it be a scam or a trap.

IT'S_A_TRAP

But the choice is entirely yours. Make sure you read the “small print” and do know the “implied terms” of the contract you are committing to.

Pros

  • In comparison to all other types of loans available on the market, the one can still find the lowest interest rate option through a Commercial Agreement. Low interest will mean that you can focus on the growth of the business without incurring high overheads which makes your budgeting easier.
  • Most of the commercial loans can be spread across numerous months, can be up to 10-15 years, making your monthly repayments tiny in comparison to the short-term snap-investment from the side needed to be paid back within 6 months or a personal loan for 15 months.
  • Your hands are untied in choosing the amount. This will be the best way for you to go if you are requiring £100K+ in funding. Focusing on crucial investment will allow you to carry on with trade/service provision without having to look for various money-pots at the initial state of turnover growth.
  • If you are eligible and meet the bank criteria than it can become the most cost-effective option for starting your business if you provide a decent business plan and know that it is going to work.

 

Cons

By now you know that I ruin good feelings but I cannot leave it without saying that Commercial Loan does not have its own drawbacks.

  • You will have to go through “eligibility check” in order to qualify for finance. It can be a right pain in the bum. You will be asked to provide not only your basic ID, Business Plan and proof of address but also meet Bank Criteria on “income” and “feasibility” thresholds and pass their stress-test on your/or your company ability to repay the debt.
  • The amount of paperwork and additional fees on the way might seem unbearable. Banks in the UK, for instance, no longer part with their money light-heartedly as they used to the pre-2010 crisis.,Thorough checks are carried out in order to avoid the “burst of a bubble” when Banks have been lending money to people not knowing their circumstance and not assessing their abilities of repayment.
  • The amount of time for all the checks to come through will have to be accounted for in advance. Usually when a new business is formed you are tied into deadlines of “schemes” or “contacts” where you are intending to ‘grab an opportunity by its tale’, sadly with the process of applying – reviewing and getting approved for a commercial loan you can end up waiting for over 3 months before the final thing comes through. It might affect your plan, you might need to adjust your business model accordingly or be flexible.
  • The most important part – COSTS. You might be aiming to get £150000, now, consider legal fees, consultancy fees, administration burden and postage & Packaging to come with it – I can reassure you your £150000 will turn into £165000 in no time. Pay solicitors, evaluation, consultants, etc, etc, etc to finish the deal. The good thing is that all costs in most cases can be added on top of your total loan requested, but bear in mind how much of an interest you will pay over the next 10 years, where £15K of raw cash might turn into £30K+ sum (incl interest) if you won’t be able to pay it on the day and will decide to add it on top of the whole sum.

 

Commercial Mortgages

It is not that much different from a Commercial Loan, and I think it still falls under the category of “cheap and easy” ways to obtain funding for the purchase of properties due to its long-term spread, manageable monthly-repayments which make short-term forecasting and budgeting simple.

Most of the description will cover both the Loans and Mortgages but to avoid boring you with details lets look at specifics for Commercial Mortgages and think through our next step.

 

Pros

  • What is it? You want to buy the house, the office space, a warehouse, anything – meaning that you want to own it. You pay the mortgage off and the property becomes yours at some point. But you don’t have a £1m to buy it outright so you apply for a Mortgage. If you are successfully repaying it – it becomes your property, your ASSET. If you are smart enough to buy it when the country is in crisis or when your country goes through a dip in property values – you rip the benefits of buying high-value building – cheap. Your asset will become your CAPITAL once the Mortgage is repaid. Meaning that you can increase your capital easy if you are smart and are prepared to wait.
  • Do you care and in-depth research of all offers on the market and chose the right funds provider. If your legal are in the clean state and finances are in the right position you will have the upper-hand in negotiations. You can hunt for the best deal – meaning that if you are taking out the commercial mortgage during low-interest rate period and secure it on fixed terms – you are with it till the end. If you are on 6%APR and the country goes through a financial boom where the APR% goes up – you are still repaying your agreed £100 p/m (maybe a bit more) and your immaculate budget stays unaffected by increasing costs whilst your profits on the rise!
  • You can deduct the interest rate charged on the Commercial Mortgage from your profit. If you are on the variable rate and your repayment goes up due to the increase in % applied, you can deduct this increase from your overall profit and it might help ‘soften the blow’ against your business during the hard times instead of burdening your with increased ongoing costs at troubled times for trade.

 

Cons

  • To get the mortgage in the first place, just as with Commercial Loans, you will have to pass the stress test on repayments and shove a healthy cash flow or a solid potential for it. But in this case, you will have to provide a deposit upfront. The deposit can be hefty and you won’t be able to apply for a personal loan to fund it as you can’t apply for debt to pay for debt…(if that makes sense). At least not in the UK.
  • Think carefully about where you want to be in 10 years time and what do you want to do with a property you are purchasing. Once the mortgage is up, unless you want to go through a ‘malaki’ of “selling the property off the auction” / repossession (which is going to ruin your credit history forever) / or some other nasty process – you will have to keep what you are paying for. Nothing stops you from selling it in the end or attempt selling half way but you are risking to lose on the value of the asset, not gain any return capital and slim up your chances on future financial deals through High Street Banks.
  • The value of your asset may plunge. You can take out the £600K commercial mortgage for the warehouse valued at that price but over the ‘course of history’ (5 years down the line) the value of the property may go down to £450k (wear and tear, development in the area, contamination, devaluation, etc) and you will end up overpaying by £250K which you will never get back if the value of your commercial premise will not rise again. It might actually never ever rise up to £600K as you could have purchased it at the peak of economic BOOM, literally weeks prior to credit crunch…
  • If you are on the variable rate and not fixed, or are on fixed but a very high rate, your repayments can splash through the roof and come down crashing on you if you are experiencing troublesome trade times. Rates may change, and change not in your favour. The economic environment is unpredictable and most definitely will go from low to high to low to high over the course of 15 years of your mortgage term – brace yourself and stay flexible.

 

Let’s see what FUNDING 3 will bring!

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