COMMERCIAL MORTGAGE
A commercial mortgage is a long term bank loan generally provided to assist with the purchase of commercial premises.
The mortgage will generally be repaid over a long term, generally 10-25 years by equal monthly instalments which could be variable or fixed. Generally funding of up to 70%/75% of the value/purchase price of the asset whichever is the lower. Banks will generally charge an interest margin over base rate depending upon the quality of the customer and the perceived level of risk. This varies from lender to lender. Banks will also charge an arrangement fee from the outset. Again this varies but is normally between 1% and 2% of the mortgage advance depending upon the sum lent. Most banks offer the option of fixing the interest rate for up to 10 years, giving certainty of cost. As security the bank will always take a first legal charge over the commercial property.
Pros
Repayments are spread over a long term keeping them at a manageable level
Repayments will generally be less than the rent payable on a similar property
An initial 12 month capital holiday is often available which helps cash flow during the initial period
Fixing the interest rate provides certainty of cost helping businesses budget/forecast
The borrower benefits from any uplift in the property’s value
Interest on borrowing can be offset against corporation tax
Cons
Being locked into a rigid repayment programme may be a problem if cash flow is seasonal or erratic
Some banks will charge a penalty for early repayment should you wish to repay the mortgage early
Buying premises involves providing a substantial cash deposit (i.e. 30%) and significant initial costs e.g. valuation and solicitor’s fees
A commercial mortgage is a long term bank loan generally provided to assist with the purchase of commercial premises.
The mortgage will generally be repaid over a long term, generally 10-25 years by equal monthly instalments which could be variable or fixed. Generally funding of up to 70%/75% of the value/purchase price of the asset whichever is the lower. Banks will generally charge an interest margin over base rate depending upon the quality of the customer and the perceived level of risk. This varies from lender to lender. Banks will also charge an arrangement fee from the outset. Again this varies but is normally between 1% and 2% of the mortgage advance depending upon the sum lent. Most banks offer the option of fixing the interest rate for up to 10 years, giving certainty of cost. As security the bank will always take a first legal charge over the commercial property.
Pros
Repayments are spread over a long term keeping them at a manageable level
Repayments will generally be less than the rent payable on a similar property
An initial 12 month capital holiday is often available which helps cash flow during the initial period
Fixing the interest rate provides certainty of cost helping businesses budget/forecast
The borrower benefits from any uplift in the property’s value
Interest on borrowing can be offset against corporation tax
Cons
Being locked into a rigid repayment programme may be a problem if cash flow is seasonal or erratic
Some banks will charge a penalty for early repayment should you wish to repay the mortgage early
Buying premises involves providing a substantial cash deposit (i.e. 30%) and significant initial costs e.g. valuation and solicitor’s fees
Equity finance is share capital vested in a business for the medium to long-term in return for a share of the ownership in, and sometimes an element of control of, the business.
Unlike lenders, equity finance investors don't normally have the legal right to charge interest or to be repaid by a particular date. Instead their return is usually paid in dividend payments and depends on the growth and profitability of the business.
Because equity investors share the risks your business faces, equity finance is often referred to as risk capital.
Equity finance is likely to be suitable for a business where:
the nature of a project deters providers of debt finance, e.g. banks
the business will not have enough cash to pay loan interest because it is needed for core activities or funding growth
Pros
The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, e.g. through stock market flotation or a sale to new investors.
The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.
In common with you, investors have a vested interest in the business' success, i.e. its growth, profitability and increase in value.
Investors are often prepared to provide follow-up funding as the business grows.
The ability to raise funds quickly on websites without having to agree to fund-raising obligations set by venture capital firms
Can help raise awareness for new businesses
No upfront fees
Investors can track your progress and may assist with brand promotion through their networks
An alternative option for enterprises that struggle to get bank loans or conventional funding
Cons
Raising equity finance is demanding, costly and time consuming. Your business may suffer as you devote time to the deal.
Depending on the investor, you will lose a certain amount of your power to make management decisions.
You will have to invest management time to provide regular information for the investor to monitor.
At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful.
There can be legal and regulatory issues to comply with when raising finance, e.g. when promoting investments.
Without Patents and Copyright protection, a company stands to lose a great deal when exposed to a large group such as a crowdfund
Crowdfunding appeal more to consumer products rather than start ups with B2B (business to business) strategies
There is more expertise for start-up enterprises with angel investors and venture capitalists than with crowd-funders
The overall risk of failure by the company to grow and succeed means that an investor has the potential to lose all
The two main providers of equity finance for private businesses are venture capitalists (also known as private equity firms) and business angels. Business angels (BAs) tend to be wealthy individuals who invest in high growth businesses in return for equity in – i.e. a share in the ownership of - those businesses. Some BAs invest on their own, others as part of a network, syndicate or investment club. In addition to money, BAs often make their own skills, experience and contacts available to the company.
Venture capitalist companies (VCs) look to invest large sums of money in return for equity in – i.e. a share in the ownership of your business.
VCs typically invest in businesses with:
a minimum investment need of around £2 million, though many smaller regional VC organisations may invest from £50,000
an ambitious but realistic business plan
a product or service that offers a unique selling point or other competitive advantage
a large earning potential and a high return on investment within a specific timeframe, e.g. five years
sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy
a proven track record - for this reason, VCs generally do not consider start-ups for investment
CROWD FUNDING
Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders. Typically, those seeking funds will set up a profile of their project on a website such as those run by our members. They can then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money. Below is a brief description of each of the different type of crowdfunding.
Donation / Reward Crowdfunding
People invest simply because they believe in the cause. Rewards can be offered (often called reward crowdfunding), such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.
Debt Crowdfunding
Investors receive their money back with interest. Also called Peer-to-Peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. In the case of microfinance, where very small sums of money are leant to the very poor, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good.
Equity Crowdfunding
People invest in an opportunity in exchange for equity. Money is exchanged for a shares, or a small stake in the business, project or venture. As with other types of shares, apart from community shares, if it is successful the value goes up. If not, the value goes down.
To learn more about your funding options and apply for business and property finance, please visit our website here.
Written by
Maurice Sardison
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