Marijana No Comments

Bridging development loans up 22% in Q1

In Q1 2018, there was a 22% increase in in bridging development loans since the previous quarter, with members of the ASTL lending £386.1m worth of development loans, of which £242.2m were categorised as bridging.

This further highlights the crucial role of the short-term lending market in supporting the property development sector in the UK.

Terry Pritchard, director at Charterhouse, said: “There’s a lot of development bridging finance at the moment and a lot of planning applications.

“We’re still a nation looking to build. I’ve seen lots of application for bridging, mostly for new build. There’s lots of business, however it’s not all good quality.”

Chris Dawe, sales director at brokerage LDNfinance, said: “This is certainly a trend that we have seen. This is mainly linked to the reduction in mainstream buy-to-let and standard property investments due to lender criteria and tax changes.

“This has prompted the clients looking to invest in property to move their focus towards alternative investment property propositions which may involve reconfiguration, refurbishment or renovation.”

Property development bridging loans are a method of obtaining short-term finance in order to either secure a property or refurbish with the intention of adding value.

These development loans exclude what is generally termed “light refurbishment”, such as the addition or renovation of bathrooms, kitchens and conservatories as these generally do not require planning permission or extensive structural changes.

Harry Hodell, senior originator at Fiduciam, said: “There is a evidenced shortage of housing throughout the UK, so increase in development bridging loans comes as no surprise to Fiduciam.

“The market demand for competitive short term funding options, remain high and although improving, funders providing competitive bridge development products are some way off meeting the demand out there.

“We expect this figure to continue growing as SME’s become more accustomed to using alternative financiers and aware of the wide range of bespoke lending available to them.”

Benson Hersch, chief executive of the ASTL, said: “The role of small and medium building firms are seen as crucial in helping solve the housing crisis but access to finance still remains their toughest barrier to overcome.

“Whilst SME building firms continue to be locked out of mainstream channels, they will increasingly rely on different sources of finance such as short-term funding solutions. These alternative forms of finance are providing a solution and allowing small developers to play their part in housing delivery.”

Source: Mortgage Introducer

Marijana No Comments

The growing popularity of bridging loans for investors

In the 10 years since the global financial crash of 2008, banks have sought to limit their exposure to real estate risk and are increasingly constrained by EU-led regulation detailing the levels of risk they can hold on their books.

However, as banks have sought to manage their risk, reducing the amounts they lend to property investors, alternative and specialist lenders have risen up in their place to meet the needs of those looking to take advantage of the steady increase in property prices seen in the UK.

More and more, investors are turning to specialist finance lenders who face a competitive lending market as low interest rates remain in place.

This trend has only been exacerbated by Brexit as the ongoing uncertainty around Britain’s exit from the EU leaves borrowers, banks and new lenders without a clear picture of the next few years.

In light of this, bridging loans are increasingly popular as a short-term solution for investors and a way for high-net-worth individuals to see a return on capital.

Although the recent rise of bridging loans is associated with specialist lenders, particularly in the commercial space offering non-FCA regulated loans, the product originated as an option for property buyers to bridge a gap between exchanging contracts and completion of a sale where you needed to purchase a property in the interim but did not have the capital.

Banks would offer short-dated loans against the property being purchased while at the same time offer a second loan against the property you were selling pending the sale of it. However, more recently the loans, although still predominantly short term, refer to products that are designed to meet more complex borrower requirements across different sectors within property.

The model is a short-term specialist solution usually offered on a term of one to 12 months. Non-regulated bridging loans can be used for a variety of purposes but it is important that the lender can track the purpose of the same. Generally, the first charge lending will be used to refinance existing debt or to release capital to assist with a purchase of property. If a loan is used to purchase a property that is to be lived in by the buyer, it falls under the regulation of the Financial Conduct Authority.

“As banks have taken a back seat on property, investment space has been created in the market for specialist lenders”

It is possible, however, to lend on a second-charge basis on a family home providing it is and can be proven to be for business purposes. This could be to release monies to pay a company tax bill or to release cash towards purchasing a new buy-to-let property to add to an existing portfolio.

ActivTrades entered the bridging loan and specialist lending market this year using our own funds to offer unregulated loans of between £250,000 and £5m. The company offers loans across the UK from 0.49% a month with terms of up to 18 months, although other term loans may be considered on an exception basis.

As banks have taken a back seat on property, investment space has been created in the market for specialist lenders. Offering bridging loans has become a way for capital holders to see a return on their money while interest rates remain low following the global financial crash and the rebuilding of balance sheets. As such, the attraction of specialist lending is that it is not as expensive as the market perceives it to be.

Specialist lenders such as ActivTrades have opted to either lend money themselves and accept a lesser return or team up with a third-party funder such as a hedge fund. This second group of lenders must offer loans at a higher rate in order to cover the charge from their funder, which is likely to be around 7%, meaning they charge a higher interest of around 10% or 11% in order to make a return. For ActivTrades, which loans its own money, borrowers can expect rates as low as 6% per year.

However, this model is increasingly under pressure as the market becomes more competitive. Yet even with increasing competition between specialist lenders, the speed at which they can approve loans, even on multi-faceted financings, distinguishes them from traditional bank lenders.

Some broker specialist lenders such as ActivTrades are able to review the requirements for a loan and make a theoretical offer in as little as a two hours. In contrast, banks must run a more stringent approval process brought in after the global financial crash, while having to increase the capital they hold to meet any future potential commitments in line with new capital requirements.

Risky business

Of course, specialist lending still involves risk and as lenders continue to drive down prices, and we have seen the property market flatten out over the past year after a period of sustained growth, there is a concern that increased competition is leading to the rise of riskier loans. New entrants to the market are adopting more aggressive stances, taking on higher loan-to-value ratios, backed by challenger banks, hedge funds, family offices and investors. There is a fear that if an alternative lender were to collapse, third-party funders would withdraw their capital, leaving the market without liquidity.

We have also seen the emergence of peer-to-peer lending, which basically offers the consumer the opportunity to invest in property transactions with a specified sum of money with the attraction of securing a much higher return on their savings than they can get on deposit accounts. A downturn in the property market could create serious difficulties in this model.

Over the past 18 months, the rise of specialist lenders in the UK has been further spurred by Brexit. Lending has become cheaper as the Bank of England has kept interest rates low due to fears of a downturn after we leave the EU.

Meanwhile, the uncertainty has meant the main European high-street and clearing banks, as well as newer challenger banks, must make sure their balance sheets can cover any downturn. As a result, the number of specialist lenders entering the market has risen substantially in the past 12 months.

Furthermore, despite the fears of an instant market impact in the immediate aftermath of the vote, there is still active interest in buying and selling property in the UK as investors look for a home for their capital until there is clarity on what Brexit Britain will look like. If the most pessimistic predictions come true, households will be £1,200 worse off a year, the cost of importing goods will increase and many will see their job certainty reduce. All of this will affect the property market.

The retreat of the big banks in Europe over the past 10 years is unlikely to be reversed and many of them are considering moving their operations abroad and continuing to downsize their businesses in the UK. And while Brexit may exacerbate the recent downward trend of the property market, there are always those who will see opportunity before prices rise again.

It is a fact that the need for bridging and specialist lending flourishes in both a bull and a bear property market, but it would be likely to lead to overexposed lenders having their lines of credit reduced or even withdrawn, which would slim down the growing number of lenders. ActivTrades is perfectly poised as we are not reliant upon funding or lines of credit and, combined with the wealth of property lending experience, are here to stay.

Source: Property Week

Marijana No Comments

Guide to Bridging Loans

In the world of property development bridging loans are often an extremely useful method of obtaining short term finance in order to either secure a property or refurbish with the intention of adding value. Traditionally bridging loans can attract interest of up to 20% (or even higher) depending upon the type of security offered, type of project, size of the loan and the loan to value ratio (LTV). On the surface the interest rate may seem extremely high but the key is how this money is used and the return it creates.

REFURBISHMENTS, RENOVATIONS AND REDEVELOPMENTS

The easiest way to show how bridging loans can assist with refurbishments, renovations and redevelopments is to give you an example.

Property acquired for £100,000 in cash

In this example a property is acquired for £100,000 with the idea of refurbishing, renovating or redeveloping. The investor takes out a £50,000 bridging loan with an interest rate of 20% (equating to 1.67% per month) for a period of 6 months. The idea is that the £50,000 investment used to fund refurbishments, renovations or redevelopment will add an additional £100,000 to the value of the property resulting in the net gain shown below:

Six monthly interest payments at 1.67% per month = £5010
Typical lender’s fee at 2% = £1000
Typical broker’s fee at 1% = £500

Therefore, at the end of the six-month period the £50,000 will be repaid having attracted interest charges of £5010 and additional charges of £1500. Depending upon the nature of the project there may also be additional legal charges.

However, in theory we now have a property worth £200,000 which cost:

Original purchase price £100,000
Bridging loan £50,000
Bridging loan interest plus expenses £6510

Total expenditure £156,510

MORTGAGING AT A HIGHER VALUE

It is now possible for the investor to take out a traditional long-term mortgage, at lower interest rates, on the new property value of £200,000. The funds raised on the higher value can be used to pay off the bridging loan where in simple terms a £56,510 investment has created £100,000 in enhanced property value.

SECURITY

All bridging loans will require some kind of security which is traditionally a property owned by the investor. This ensures that in the event of financial problems in the future the bridging loan can be paid off by disposing of the secured asset. As an investor is obliged to use one of their own/company assets as security against the bridging loan this ensures that they have the strongest incentive to fulfil their financial obligations.

BRIDGING LOAN CHARGES

As we touched on above, bridging loan charges can add a significant amount to any bridging finance and this is something that investors need to be aware of. In recent times we have seen challenges to the traditional bridging loan market in the shape of crowdfunding bridging loan operations which effectively link investors directly with borrowers. Some of the benefits of crowdfunding bridging loans include:

• Reduced additional expenses with specific focus on crowdfunding bridging loans in theory attracting increased volumes.
• Reduced operating expenses and third-party commissions have led to a fall in traditional bridging loan interest rates. In simple terms, crowdfunding reduces the layers of bureaucracy.
• More attractive repayment options with many crowdfunding deals offering early repayment with no additional charges.

Crowdfunding bridging loan companies still require the same level of security as more traditional bridging loan companies. However, they take full advantage of the online market thereby reducing their own overheads leading to reduced charges for customers. As we have seen with private loans, business loans and property development finance, crowdfunding is putting significant pressure on more traditional rates of interest.

Source: Property Forum

Marijana No Comments

Pensioners seeking payday loans almost double in two years

The number of people aged over 65 applying for payday loans has almost doubled in just two years, according to new research.

Figures from short-term credit broker CashLady revealed a 95 per cent increase between 2015 and 2017 in the number of pensioners turning to short-term financial help to top up their monthly pension.

The average monthly income of older people applying for these loans went up by £157, from £1,478 to £1,635, in the same period.

Despite a 10 per cent rise in monthly income, the research revealed the loan amount requested had increased by 26 per cent – suggesting pensioner income is struggling to keep pace with the rising cost of living.

In the space of two years, the average amount individuals applied for has increased by £80, from £302 in 2015 to £382 in 2017.

Chris Hackett, managing director of CashLady, said these figures suggest there were more and more older people living off their pensions yet struggling to make ends meet.

He said: “Inflation has been stuck at a high level for the last five years and while pensions have gone up, the shortfall between income and the cost of living is becoming increasingly apparent.

“The challenge for many of these applicants is our lenders will only approve loan applications if the person is in employment, which effectively rules out short-term loan options for those already retired.”

Earlier this month, research from the Pensions Policy Institute (PPI) revealed millions of people were almost completely reliant on a basic state pension of just £7,000 a year to pay their bills and live in retirement.

The report showed that for the poorest pensioners, £3 in every £4 of their income comes from the state pension.

The poorest pensioners are also seeing the lowest rise in income, since pension credit is set to increase by less than the state pension next April.

Paul Gibson, managing director of Granite Financial Planning, said he was surprised with the research results.

He said: “I don’t think most financial advisers clients would typically fall into this category and none of my retired clients have any borrowing requirement.

“Whilst the data may be accurate the annual percentage rate quoted on CashLady website of 1,272 per cent is quite staggering. It seems to be akin to putting petrol on a fire to try and put it out.

“If people are genuinely struggling I would hope there are better ways to cover this short-term debt, but high street banks’ lending criteria has now become so restricted they are not helping the problem as perhaps they should be.”

Source: FT Adviser

Marijana No Comments

Bridging set for another boost – London Credit outlines why 2018 looks set to be another excellent year for the bridging finance sector

Bridging finance continues its rise as a truly effective funding option. Industry bodies have reported a record year in 2017 and the indicators show that this is set to continue this year, still playing a vital role in helping to fund property renovation and change of use. With the supply of rental property still in high demand, short-term finance has an ever-increasing role to play in easing the housing crisis and supplying businesses with much-needed funding to expand their premises.

The demand for bridging finance doesn’t seem to have been dampened by several legislative changes to the buy-to-let market: more stringent affordability tests, tax relief and stamp duty rules were all introduced last year, but the demand for bridging has remained strong.

Even the PRA rules, which mean that landlords with four or more buy-to-lets need to submit details of their existing mortgaged properties, haven’t dampened demand. Now that the new rules have had time to settle in, we’ve seen a steady stream of enquiries from portfolio landlords for blocks of flats for student accommodation and HMOs for young professionals. This is particularly important in major cities where rental accommodation is at a premium, as house purchase is still a pipedream for many, despite the stamp duty relief for first-time buyers in the Autumn Budget.

The purchase price of a property is a key factor in determining yield for a landlord and, depending on the amount of renovation needed, can help keep the costs down. As long as the property is rented out at the market rate for that area, higher yields could result.

Auctions remain a good way for investors to acquire property at a competitive price, often below market value, and 2017 was another positive year for auction sales. Landlords and developers are snapping up residential rental and commercial units, particularly when work is needed on the property for either refurbishment or change of use. At an auction, completion needs to happen quickly, often within 28 days, so bridging finance is the ideal way of making this happen.

It’s vital that developers get a fast turnaround, so they can start work on the property as soon as the funding is in place, allowing them to shorten the time it takes to get the property on the rental market. To exit the bridge, some of our clients refinance to a longer-term loan with a more traditional lender or sell the property at a profit.

In short, the bridging finance sector is in great shape, and despite legislative changes and Brexit uncertainty, it’s proved to be resilient to such factors. There is a range of lenders servicing a variety of funding types and loan sizes, with more alternative products on offer than we’ve seen for many years. Short-term finance offers a real alternative to mainstream funding sources and bridging remains one of the best ways to act quickly when opportunities arise. It looks set to remain just as popular in 2018.

Source: PR web

Marijana No Comments

Why small (but growing) is beautiful

2017 was a momentous year for bridging, with annual lending breaking through the £3bn figure for the first time. But before we get carried away, we need to bear in mind this is equivalent to only around one 19th of the residential mortgage market.

By its very nature, bridging is a niche lending market – although it has shown a remarkable ability to adapt and thrive, providing solutions to new market needs in recent years. For property refurbishment in particular, the options now available to developers are far more widespread and competitive.

Who in the mainstream market, would have thought a decade or so ago that bridging would have proved such a socially useful form of lending, enabling empty and neglected property to be brought back into use, and supporting entrepreneurship?

Yet here we are, and I am excited about where the future might lead us.

Gone are the days when the only awareness that people had of bridging finance was in managing the mismatch of timing in the sale and acquisition of two disparate assets.

Now, there is a growing recognition that short-term finance can bridge not just a timing gap, but other gaps as well – the risk appetite gap, for example (especially as far as big banks are concerned following the global financial crisis).

Occasionally, though, I hear rumblings of concern that the bridging market is growing too fast, and risks stoking problems rather than solving them. I also hear concern about the fact that too few intermediaries operate across boundaries – brokering both short term and long term borrowing solutions for their clients.

On the first point, I see little evidence of difficulty. If anything, short-term lenders are more acutely risk aware than their long term counterparts, as the impact will hit them sooner and harder if their customer cannot repay as planned.

As long as sensible due diligence is conducted and the client has a clear exit route, if the demand is there it makes sense to meet it.

As for the second point, I have a degree of sympathy. There are still only a relatively small number of brokers who engage with bridging, with few mainstream brokers considering this as an option – although this number is growing. Holistic advice, and access to the widest possible range of solutions, must always make sense from the client perspective.

One of the benefits of being part of a growing market is the increasing likelihood of forming part of the suite of options on offer. I’m sure it is only a matter of time until more brokers realise it makes sense to look at all options and this in turn will lead to the further growth of the bridging market

As we look ahead, there will be an increasingly fuzzy boundary between products, yet an increasingly clear expectation on the part of clients that their advisers will have all available options at their fingertips. It’s clear that bridging has now earned its place among those options – and that can only be a good thing.

Source: Mortgage Introducer

Marijana No Comments

A look back at the short term lending market for 2017

2017 was preceded by a long spell of huge growth and this year is no different, but it hasn’t been without a few bumps in the road. The sector suffered a short period where business levels dipped following the referendum, and again after the rate rise, but quickly bounced back on both occasions demonstrating its resilience and ability to adapt.

There have been many new entrants to the market, with a particular focus on the heavy refurb and development markets; this is largely down to the extension of permitted development rights. The rise in refurbishment lending could also be indicative of an increase in desire to improve existing properties rather than move, coupled with the lowest mortgage approval rate on new homes for over a year. Another reason for growth could be that mortgage delays continue to be the leading reason for the use of short term finance.

Overall, there has been a lot of liquidity in the market with fierce competition which has driven rates down even further. The lowest available rate is currently 0.44% pm and the most competitive we’ve ever seen.

Short Term Lending product of the year

This year, Interbay, part of One Savings Bank launched in to the short term lending market. Brightstar were fortunate enough to be selected to trial their product with a headline rate of 0.44% pm. This offers non-regulated clients the ability to benefit from the UK’s most competitive short term lending rates, starting at just 5.28% PA for loans up to 55% LTV.

The product can also be used for property requiring light refurbishment.

The LTV brackets are 0.44% up to 55% LTV, 0.54% up to 65% LTV, and 0.64% up to 75% LTV.

All LTV brackets carry a 2% fee with no exit fee or ERC.

Source: Financial Reporter

Marijana No Comments

Rise of 115% in numbers applying for a short-term loan to pay their mortgage of rent

THE number of people in the UK turning to short-term loans to cover their rent or mortgage has more than doubled, according to new statistics.

In the past two years the number of people applying for short-term credit who said they needed help paying for their accommodation increased by 115 per cent.

New data from FCA authorised credit broker CashLady found the total number of people applying for loans has also nearly doubled since 2015, with a 93 per cent increase in volume.

As well as the number of loan applications rising, the average loan amount requested by those struggling in the UK has increased by 45 per cent from £224 in 2015 to £325 this year. The statistics from CashLady come just weeks after the Financial Conduct Authority revealed that one in six people in the UK (17 per cent) would struggle to pay their mortgage or rent if it increased by just £50.

Earlier this month, the Bank of England’s Monetary Policy Committee announced it would increase interest rates for the first time in ten years — from 0.25 per cent to 0.5 per cent.

Figures also revealed that NHS workers still top the list of employees who most require emergency financial help.

They are followed by supermarket staff from Tesco, Asda and Sainsbury’s. Struggling members of the armed forces also make up the top five workforces requesting loans.

Managing director of CashLady, Chris Hackett, said being able to keep a roof over your head is “a basic human right.”

He added: “These figures, uncomfortable as they are, lay bare the state of the nation as people are struggling to cover their rent or mortgage payments.

“Wages for some of our most valuable members of society are just not high enough for them to manage basic living costs and they are regularly being forced to seek out short-term financial help.

“Housing expenditure is the largest monthly expense for our customers and they should be able to comfortably afford this before turning to emergency finance.

“We act as a broker for short term credit to help our customers find financial assistance from FCA authorised credit providers instead of seeking out illegal or potentially dangerous alternatives.”

The CashLady figures have been released after Chancellor Philip Hammond was accused of leaving ‘ordinary’ Brits out of yesterday’s budget, by failing to mention a wage boost for public sector workers, despite claiming to “support our key public services.”

Source: The National

Marijana No Comments

Short-term lending industry shows increased consumer confidence

The highly controversial high-cost short-term (HCST) credit industry has seen a huge increase in consumer confidence in the UK.

The high cost loans, otherwise known as payday loans used for emergency purposes, have always been subject to huge criticism from the press and MPs. In particular, payday giant Wonga was once accused of “usury” for facilitating loans with an APR of over 6,000 per cent. However, following new regulation, the industry has seen a dramatic change in transparency and consumer confidence.

The introduction of FCA

The Financial Conduct Authority took over as the main regulator for consumer credit in 2014, officially launching in January 2015.

One of its first changes was to ensure that all lenders and brokers trading in the payday sector were fully authorised and fit to carry out regulated activity. Companies were granted “interim permission” whilst applications were being processed, with most companies taking around 12 months to become fully authorised – such as QuickQuid, Peachy and Uncle Buck.

The rigorous process managed to remove more than half of the companies offering high-cost short-term loans from the industry – allowing only the most compliant to survive.

The role of authorisation has significantly de-powered the role of brokers in the industry, who until this point had been regularly capturing data and re-selling it multiple times for profit. Prior to 2015, it was unclear for many consumers which website was a lender or broker, hence many applicants would fall victim to their details being sent to hundreds of companies, bombarded by text messages and phone calls and in several cases, upfront fees being taken out as a cover for “admin fees”.

This led to the payday industry receiving over 10,000 complaints between Jan and March 2014. But since the introduction of FCA regulation, the process of brokers selling data has diminished significantly.

The price cap

In addition, the FCA the introduced a price cap for the payday industry to limit the amount that lenders could charge. This capped daily interest at 0.8 per cent, equal to £24 per £100 borrowing and meaning that customers would never repay double the amount they asked to borrow. This resulted in several more companies leaving the industry, deeming that the margins were no longer “commercially viable”. A price cap on default charges was also established, limited to a one-off fee of £15.

One function of the price cap was to encourage new competitors in the market to compete over other factors such as even lower rates, flexible product offerings and customer service.

Checks

All lenders were required by the new FCA regulation to carry out full credit and affordability checks prior to funding a loan. This indicates that lenders have to prove that a borrower can afford to repay without falling into financial difficulty. The role of underwriting was somewhat loose previous to FCA – with several loans granted by lenders in an attempt to increase profits by extending loans and triggering late fees. In fact, several large lenders were fined millions of pounds for failing to demonstrate adequate checks. Wonga was fined over £200m in October 2014 and QuickQuid fined £1.4m in November 2015.

However, with strict checks now a requirement, there is an emphasis on only giving loans to those that can afford it. The downside is that less and less people will be approved for loans as lenders become more restrictive. Wonga notoriously cut its number of approved loans from one million in 2014 to 550,000 in 2015.

Transparency through comparison websites

In an attempt to increase transparency of prices, all lenders are now required by the FCA to include a link to a comparison website clearly on the website homepage. This should allow the user to see clear comparison tables and compare the rates of that lender against other competitors. Leading comparison sites in this industry include Money.co.uk, All The Lenders and Quiddi Compare.

How consumer confidence has increased

The role of regulation has significantly increased consumer confidence for those looking for a high cost loan.

As we approach the three-year anniversary of the FCA’s regulation in the industry, we see that applicants have a much better idea of what lenders charge, without fear of very high costs or their personal details being sent to numerous companies and fees being taken out for no reason.

This has been emphasised by the number of people searching for payday related products on Google and the topic being mentioned considerably less in the press.

In addition, a recent review by the FCA of its price cap indicated that it was “happy” with how it was being conducted and how there were overall significantly less complaints in the industry. The price cap and regulation for the high-cost short-term credit industry will not be reviewed again until 2020.

Source: Real Business

Marijana No Comments

How & why short-term business loans make sense for experienced entrepreneurs

Many business loans are substantial, long-term commitments that come with a mountain of paperwork to wade through and complicated lending terms that are foreboding for business owners that only need a reasonable amount of extra money for a limited period.

While long-term business lending is intended to cover expansion requirements, buying out a competitor or for another critical need, short-term business loans are suitable for businesses that have some immediate expenses or ones that are upcoming over the next few months. The typical shorter loan period is repayable over a 12-month period, although there are some that run longer than this to provide a bit more time to repay.

Which Businesses Can Access a Short-term?

In this first instance, short-term business loans are available to UK businesses registered as a limited company, operate as a sole trader, or as an incorporated partnership. For companies, they must be registered with Companies House as a UK company with its company filings being up-to-date.

Most lenders will want to see at least one year of business operations (often longer), with the most recent yearly statutory accounts filed with Companies House confirming a 12-month turnover that exceeded £100,000. While a short-term business loan is often unsecured, being a homeowner is usually a plus. The debt obligations of the business must be manageable at their current levels – preferably with a good deal of slack to afford the additional repayments of a short-term loan – and the director shouldn’t have any outstanding creditors from a previous business either.

See https://www.merchantmoney.co.uk/small-business-loans/short-term-business-loans/ for a guide on the application specifics for small business owners looking for short-term funding.

How Much Can Be Borrowed?

The maximum loan amount depends on the lender’s policies and loan criteria. A business that’s only been operating a year with limited profitability will not be offered as much as a more established business with a million-pound turnover and six-figure profitability every year.

Short-term small business loans fall between the £3,000 and £150,000 range, which keeps the repayments reasonable and the total interest and closing costs affordable.

Best Uses of a Short-term Business Loan

Managing the demanding cash flow requirements of a company is tricky. There are times accountants make a mistake or omit some important upcoming expenses, which leaves an unexpected hole in the accounts that must be filled. It’s a situation that usually can be traded out of using future profits to fill in the hole where the miscalculation was made, but in the meantime, the company faces the likelihood of running below a zero balance until they can recover. To ensure they can keep trading profitably, a short-term loan is a useful, structured way to deal with the issue rather than using an overdraft facility that often seems to work like quicksand; the more you use it, the deeper you sink.

A lower than expected seasonal sales season can cause a problem with balancing the books through the worst periods of the year. With a company that is showing positive signs of sales growth the rest of the year but is suffering through their usual seasonal dry spell, a short-term facility makes sense to survive the period and use upcoming profits to pay off the loan a few months’ later.

Expanding staff or larger facilities to handle a surge in business where the cash flow drags behind the gross sales is another area where a long-term lending facility won’t make much sense, but a 12-month one certainly does. Having enough staff on-hand improves morale while the business is under strain from rapid expansion. Similarly, opening an annex or taking over the next-door office helps to manage staff numbers ahead of the rise in profitability.

When Is the Wrong Time to Take Out a Short-term Loan?

Taking out a short-term loan for a business that’s declining isn’t the smartest move. There’s no telling whether the sales decline is going to continue when it’s not due to known seasonality reasons. It is best to survey the customers (especially the ones not buying the product or service) to determine what is causing them to pass on your offer? Then fix the problem.

A company that is perennially short of working capital won’t benefit much from a short-term facility because unless the fortunes of the business improve in the short-term too, it will be ill-equipped to repay the loan in time. Taking out a new lending facility to repay the first one won’t work like it does with a credit card minimum payment because short-term loans are not necessarily paid in full all on the back-end.

There should always be sound, well-considered reasons for taking out any lending facility. Otherwise, it’s an expensive way to meander along in a business being unsure what to do with the extra cash. More money and no plan surely are a bad idea, especially for a company that will need to repay the loan, plus interest, inside of a year or less. Borrowing prudently is the best idea.

Source: BM Magazine