In these complex and uncertain times, now more than ever businesses need to ensure they have in place the most useful financial support they are able to obtain. The government has made a variety of support packages available to organisations of varying size, but sooner rather than later it is likely that many businesses will need to look to their bank or other lenders to explore their options.
More often than not, unless looking at loan/credit values which are very modest, most banks and other lenders will require security to be provided in return for providing credit facilities.
The purpose of this note is to set out a user-friendly overview for borrowers of how this commonly works, leaving aside some of the technical details, and provide some pointers to help ease the process if this is a route you decide to explore.
Secured commercial lending – what is it?
Secured commercial borrowing has one obvious parallel to residential borrowing, in that both typically involve a legal charge secured on property – but that is generally where the similarity ends.
Why is this? Because depending on your circumstances and the end of the loan market you’re looking at, in addition to granting a charge over property you could well be asked to provide further security that goes over and above this – so it’s important to understand what this is likely to be.
Common forms of security in commercial lending
Starting at the beginning, every secured lender will invariably require an ‘all monies’ legal charge over the property (or properties) you put forward as security. An ‘all monies’ charge secures all sums owed to a lender, directly or indirectly, both at the time the charge is granted and at any point in the future, up until the charge is released by the lender.
How could you owe money ‘indirectly’ to a lender? The most common way this could happen would be if you were to stand as a guarantor for a third party, the effect of an ‘all monies’ charge here being to sweep those guaranteed obligations into the security created by the charge, thereby securing them against the subject property.
Charges such as these typically also create some further ‘fixed’ and ‘floating’ charges over the assets of the business. The detail of these is outside the scope of this note, but you need to be aware that they are likely to be created at the same time and to remember to ask your lawyer to explain them to you, as you will find that it isn’t purely just ‘the property’ over which security is being created.
In addition to a legal charge, it is increasingly common for lenders to require a debenture, the primary purpose of these being to create security over the assets and goodwill of the business in a more general sense – effectively these create security over the actual ‘business’ itself. This isn’t to say that you would stop being able to run the business, but at the same time you should be aware that the effect of these is quite far-reaching.
If your business is a limited company, depending on the stature and maturity of the company, you may find that the directors are also asked to provide personal guarantees in respect of the company’s obligations – these generally do exactly what it says on the tin, but you should be aware that these generally go ‘a bit further’ than simply being guarantees and can sometimes be used to give the lender the ability to ask you to perform the obligations before it pursues the business.
This sounds horrendous, is it all really necessary?
There is no getting away from granting a legal charge over the relevant property, that is simply a fact of life in secured borrowing - but when it comes to a question of granting debentures and guarantees, these are obviously things you need to consider carefully before agreeing.
Lenders operating at the sharper end of the market will commonly ask for debentures and guarantees whether or not they are proportionate to the loan/risk involved and may push you to agree to them at an early stage, so it’s important to enter into discussions with your eyes open.
A debenture, after all, is likely to capture ‘the whole’ of the business and giving a guarantee brings obvious financial risk.
Acting for a borrower, our advice would always be that no more security than is absolutely necessary should be granted. For example, if you have property worth greatly in excess of the amount you wish to borrow, it could well be reasonable to push back on a lender’s request for a debenture and/or a guarantee, as a legal charge ought to provide sufficient comfort/security by itself – but as with everything, the likely success of the push-back is going to depend on your circumstances.
If directors are pushed to provide personal guarantees for a company’s borrowing, they should seek to insist that these are limited to specific sums, rather than being left open ended.
My business doesn’t own property in its own right, can I use my own property as security for the borrowing instead?
Short answer here – generally yes, provided there is sufficient equity in the property proposed for the security. If you have an existing mortgage on the property then there will need to be an agreement between the respective lenders as to how the equity would be divided up in the event of enforcement action, but this isn’t at all unusual.
Obviously all the property owners would need to be a party to the legal charge being granted and it would also be necessary for them to obtain independent legal advice as to what was being done, but many lenders are happy to work with this.
So what’s the effect of granting all this security?
There’s no getting away from the fact that charges and debentures create far-reaching powers in favour of a lender – they both typically contain provisions to allow a lender to come in and manage/control either or both the property and the business as they see fit, ultimately culminating in their ability to dispose of them to recover the monies owed.
But the comfort you have is that these are powers which can generally only be exercised if things go wrong and it’s become necessary for the lender to take recovery proceedings.
How do I know whether what I’m being offered is reasonable?
It’s important to take advice at an early stage and ideally go through a reputable broker with access to the whole of the market.
The commercial loans market is very different to the residential one, especially once you start looking at non-mainstream/non-high-street lenders; whereas consumer loans are subject to safeguards and restrictions to protect individuals from unduly onerous terms, the commercial loans market represents a much tougher operating environment and the terms on offer at the sharper end will freqently reflect this.
Therefore, take advice – we are happy to have preliminary conversations with you on a free of charge basis and can introduce you to brokers who have repeatedly delivered for our clients.
So, what is the solicitor’s role in all of this?
Our role is to get all the parties involved to a point where they understand what they are signing up to.
Generally speaking we can act for both lenders and borrowers in a transaction (provided it’s appropriate in the circumstances and both parties give their consent).
In terms of the lender, we have to report to them on the title to the property involved (i.e. the various legal ifs, buts and maybes contained within the title documents) and also carry out the due diligence that they require – which generally means carrying out conveyancing searches and going through an enquiries process with you. We also have to check the lender’s valuation report against the facts of the situation – for example, we have to verify the position as regards planning permissions and confirm the terms of any leases/licences-to-occupy which may be in place.
Acting for borrowers we report to you on the terms of the security to be granted and generally interface between you, the lender and any brokers involved.
In today’s world a ‘one size fits all’ approach just doesn’t work any more, which is something we see reflected increasingly in the approach and attitudes taken by both lenders and brokers. It is something we are also proud to keep at the forefront of our minds in representing all of our clients wherever and whoever they may be.
How can I help to make sure a financing exercise goes smoothly?
Once you have received an ‘agreement in principle’ from your chosen lender you will be asked to pay a valuation fee so that the lender’s valuer can carry out a formal valuation of the security property – until you have paid this and the valuation has been carried out, the transaction will effectively be ‘on hold’.
This means you will likely be put under pressure to pay the valuation fee as quickly as possible, but do make sure you’re content with the terms on offer before you do so.
Otherwise, the most important thing a borrower can do is to be prepared, which means being ready to provide copies of any documentation you have relating to the property – for example, if there are tenancies in place, be ready to provide copies of the documentation, and also be ready to provide a copy of your up to date buildings insurance policy. If the property is subject to existing mortgages or charges, be ready to provide copy account details so that redemption statements can be requested.
Your solicitor will need to go through a basic form of enquiries process with you to satisfy any lender’s requirements and your solicitor should provide these to you at an early stage.
More often than not we will be able to obtain the ‘title’ to the property directly from the Land Registry (most property in England & Wales is now registered) but if this isn’t the case, you should identify who holds the title deeds and be ready to request them.
As mentioned above, there is no ‘one size fits all’, but thinking about these points at an early stage would be helpful.