Commercial Borrowing Outlook H2 2017
Our latest outlook for commercial borrowing as we head into the second half of 2017. All the changes, new things and what you can expect from the rest of this year.
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After 2016 I can only reminisce about the salad days when politics and finance were grey, boring and where nothing ever happened. Finally, the world is more exciting but also far more uncertain. Uncertainty has to be the biggest concern regarding access to funding. Here’s my take on what may lay ahead for the rest of 2017.
There are clear signs that competition is returning to the commercial lending sector. We are seeing interest charged on commercial property start to come down. Whilst competition among lenders has to be positive for the borrower we continue to see clear divisions in lender appetite.
The traditional lenders remain traditional in their outlook and to a large degree remain behind trend. With the alternative lenders and challenger banks moving their rates closer to those on the high street and making access to money easier we are starting to see true competition begin to emerge. This should mean that access to commercial property finance will favour the borrower with 2017 offering good opportunities for investors and landlords to borrow.
Avoid the religious angle on this one and you can see some serious ethical benefits in play.
Awareness of Sharia finance is growing, albeit slowly. 2017 has seen a mainstream bridging lender offering a Sharia bridging product for the first time.
Later this year we expect to see the first Sharia business finance peer to peer platform go live. Watch this space as this one is going to grow in prominence over the next couple of years.
Unsecured Business Borrowing
We are starting to see some collaboration and some consolidation among unsecured business lenders. That is nothing unexpected. Funding Knight moved away from the unsecured sector following a worrying period and a buy out by a VC.
What we are seeing that appeals to companies is the increase in the limit of unsecured business loans with some providers lending up to £350k backed only by a personal guarantee. Add in completion within a week and businesses have a viable alternative to bank lending that is both more flexible and far, far quicker.
The joy that is regulation. January saw the start of new PRA rules on affordability. August will see an expansion on this. As we stand now there are benefits to borrowing as a company when it comes to investment property. The decision on how to purchase property has typically been around the tax benefits. I would add in that consideration should be given to an ability to borrow.
Even with no trading history, a limited company borrowing to buy investment property could get better terms than a personal buyer. This is driven by changes to regulation however the differences are such that it should be a very real consideration for the borrower to discuss with their advisers.
When it comes to investment property we are seeing tangible changes in how property is being used. HMOs continue to be popular, with Airbnb and short term letting starting to gain traction. All these are offering potentially better yields than a single AST. As usual traditional lenders are lagging behind the trend, however we are seeing innovative lenders recognise both the HMO and short term let market. There are some very good options for investors wanting to utilise holiday lets, Airbnb or short term lets.
These options include up to 24 months with zero payments (not even interest) and flexibility on income calculations. Just as the regulators introduce guidelines on how things should be done the whole ball game has moved on. At least some things remain constant then…
There is some serious change going on with the underwriting of business borrowing. We are seeing more lenders using complex algorithms to underwrite applications from trading businesses. I am not against using these systems, my advice to clients is to understand the information they are handing over with this responsibility falling to their bookkeeper or accountant also. Algorithmic underwriting requires the information being given to the lender to be up to date and accurate.
With lenders looking to have access to HMRC filings, VAT returns and cloud bookkeeping systems it is more important than ever that returns and books are up to date. For companies still using spreadsheets to keep track of things then they may suddenly find it harder to access borrowing.
For clients it is key to understand why a lender is asking for things. If you are not sure why a lender wants something then please ask rather than risk losing finance over a technicality. For companies where new funding will materially change future income then this type of underwriting will work against you. Be careful.
These remain a hot topic as many renegotiation clauses are going to fall due on loans with very low interest rates. Lenders will be keen to increase their return which is to be expected, however there continues to be some surprise among borrowers that these clauses exist. Historically lenders have not always enforced these clauses.
With base rates remaining low we expect to see more break clauses enforced. Check agreements in advance and don’t get caught out. Summary Despite the uncertainties the outlook for commercial borrowing remains positive. Options are available for property investors and trading businesses.
If you have any questions about this update or want to add your view to it then please get in touch. The update is purely for information so treat it as such.
By Dave Farmer
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