The idea of raising money has created dread amongst business owners for generations, but now the commercial finance market is changing.
New lenders are entering the market, new products are being offered and the choice for business owners is growing. Gary Hemming, senior consultant at ABC Finance, talks through the options.
Although more choice is usually a good thing, a lot of the café owners I speak to are finding it harder and harder to find the right product for their business. New products can be confusing and costs difficult to compare. In this article, I will break down the products available, when they should be used and how to select the most suitable product for your business.
Purchasing or refinancing a café
Buying a café
When purchasing a café, along with the building it trades from, a commercial mortgage will almost certainly be the right option for you. Commercial mortgage lenders will often lend based on the 'going concern' value - a combination of the business and property value.
The maximum loan to value is usually 65-70% of the going concern value. Some lenders will lend up to 75% of the 'bricks and mortar' value, although this tends to be significantly lower than 65% of the going concern value.
When buying a café without the premises it trades from, then commercial mortgages won't be for you. As you won't own the property that you will be trading from, you will need to consider business loans. The interest rates tend to be a little higher, typically at 6-12% per annum, and the term of the loan will be shorter than with a commercial mortgage.
Some business loan lenders will want to take security over property (such as your home or another property), whereas some will be happy to lend without security.
Refinancing a café
For those who are already successfully running a café, and owning the property from which it trades, regularly checking your commercial mortgage options is essential.
If you already have a commercial mortgage then you may be able to save money, either on a monthly basis or by reducing the total interest paid on the loan.
The simplest way to do this is to check with your own provider whether they are able to offer you a better deal, and then comparing their offer with others by using a fee-free commercial mortgage broker.
If you have other borrowings, you may be able to consolidate them into your commercial mortgage to reduce your interest rate and monthly costs. When considering this, you must be mindful of increasing the total interest paid over the term. A good commercial mortgage consultant will be able to break this down for you.
Raising working capital
Cash flow is the key to success for every business. When cash flow becomes tight, finding the right product is crucial to avoid causing further problems down the line.
When raising funds to support your working capital requirements there are a few key points to consider, including the cost of borrowing, the monthly cost and the likelihood of being accepted.
Although there are lots of products out there, the most suitable ones for café owners can be split into the following three categories.
1. Business loans
Not so long ago, your own bank was the only viable option for a business loan. Due to advances in technology, and to a large part crowdfunding, there are numerous lenders out there and funding has become faster and more accessible.
Unsecured business loans work in a very similar way to personal loans, with fixed repayments made monthly, over a fixed period with the loan gradually being repaid with each payment.
The lowest rates tend to be available to those with a clear credit history and at least two years of trading history. Unsecured business loans tend to be available from £5,000 to £500,000 over a term of 6-60 months. The maximum loan and rate charged will depend on your credit history and the trading performance of your business.
Unsecured business loans usually take around five to seven days from application to the funds hitting your bank account.
2. Merchant cash advances
Merchant cash advances, also known as business cash advances are a relative newcomer to the unsecured business finance market.
Like business loans, on completion of your application, a lump sum is paid into your bank account. The amount available is usually between £3,000 and £300,000, depending on the strength of your business and the amount of money you take each month on your card terminal.
Cash advances allow you to borrow against your future card takings, with repayments made automatically at a pre-agreed percentage of your future card takings.
Unlike other forms of business borrowing, the repayments are not over a set term and do not have a set interest rate. From the outset, a pre-agreed repayment amount is set, for example, a £10,000 facility may be set at a repayment of £12,000.
Merchant cash advances can be easier to secure than traditional business loans as the repayments are automatically deducted from your card receipts.
3. Business revolving credit facilities
There are a number of revolving credit facilities available to business owners and although they may be presented differently, they all serve a similar purpose. Revolving credit facilities can be drawn down and repaid as the client's needs dictate.
The most well-known revolving credit products are overdrafts and credit cards. The products tend to be simple, with a pre-agreed credit limit agreed at the start and a set interest rate charged on the funds drawn.
Revolving credit facilities are perfect for café owners who's working capital position is often up and down. By taking a revolving facility, interest is only paid when the funds are drawn, which could be cost-effective compared to a traditional business loan.
Upgrading your café
Investing in new equipment or refurbishing your café can give your trading performance a real boost. Funding refurbishment or new equipment can get very expensive and have a real impact on your cash flow.
There are several products available to fund these improvements, firstly, the unsecured business finance mentioned above. The most suitable of these products to pay for upgrades is usually going to be the unsecured business loan as it allows you to spread the cost of repayments over a set term with a simple repayment structure.
In addition, there are further products available which are ideal in this situation.
Asset finance is a product widely associated with the acquisition of new equipment for a business. Products can be broken down into leasing, hire purchase and loans. These products all allow you to take on a new asset in exchange for set repayments over a defined term.
The main differences come down to whether you actually own the item, or simply lease it for the term of the finance. If it's important that you own the item at the end of the term, then speak to an asset finance broker who will be able to breakdown your options and the costs associated with each.
The costs associated with asset finance depend on the product chosen and the asset purchased. It is advisable to get more than one quote when looking to take out asset finance as the costs from different providers can vary greatly. If time is an issue, a broker will be able to do this on your behalf.
Secured business loans
Secured business loans allow you to take out a loan, using your home or business premises as security. The rates offered tend to be lower than unsecured loans due to the increased security offered to the lender.
This is offset by the additional risk that you have effectively taken on. Should you fail to keep up your repayments, the security property may be at risk of repossession. This must be taken into account when comparing the different options available to you.
Further information on commercial mortgages and other types of finance can be found at www.abcfinance.co.uk/commercial-mortgages