Overview of loans, mortgages and guarantees

Businesses often have to borrow money, and how to do this is a question it pays to research.

Borrowing may be necessary while the business is starting up, if a big order comes in, or if the business wants to expand. The following is a brief guide on the subject of loans, mortgages and guarantees.

Loans

A loan is credit that you borrow and repay over an agreed length of time. You will have to repay the sum borrowed plus (usually) interest on the loan. The amount of repayable interest will depend on:

• how long you need the loan for;
• how much you borrow;
• whether the loan is secured against some of your assets;
• prevailing interest rates.

The interest rate may be:

• fixed (ie, it won’t change for the length of the loan); or
• variable (ie, it changes with the Bank of England base rate or the bank’s cost of borrowing).

Businesses can often borrow money in such a way that it reduces their overall tax bill. Tax relief can offset some of the costs of borrowing, and should be fully exploited.

Borrowing to purchase an asset such as plant, machinery or IT equipment means you can deduct a proportion of the cost from your annual taxable profits. These “capital allowances” are available whether you buy on hire purchase or borrow to buy outright. Some businesses may be able to claim a higher capital allowance in the year of purchase, so it is a good idea to check whether this is the case. A 100% capital allowance may be possible for businesses which are converting vacant or under-used space above commercial premises.

The interest payable on a loan or hire purchase agreement used to buy an asset is tax deductible as it is a business expense. Similarly, interest paid on overdrafts and credit cards is tax deductible, as long as it is used for business purposes. If the overdraft or credit card is also for personal use then this is not possible.

Guarantees

It is sometimes difficult for new businesses with no financial track record to gain capital through obtaining a loan from a bank or other lender.

Lenders may sometimes ask for a loan guarantee. This may be provided by another business or individual, or the lender may ask for assets such as property as a loan guarantee. This protects the lender in the event of the business failing to make its repayments.

You may have to pay the provider of the loan guarantee a regular fee or a one-off premium.

Where a company is limited, lenders will usually ask for a personal guarantee from the directors or backers of the company. Caution should be exercised when giving a personal guarantee—make sure they only apply to specific debts, and do not make you liable for all the losses of the business. Do not give a personal guarantee for an unlimited debt.

Government guaranteed schemes

During challenging financial times, banks are more reluctant to lend. There are, however, some government guaranteed lending schemes available for businesses seeking to raise finance, such as the Enterprise Finance Guarantee scheme. This scheme supports bank lending for a period of three months to 10 years, and is aimed at businesses which are unable to access the finance they need.

The Growth Accelerator Scheme is a partnership between government and the private sector which sees business experts working with companies to identify their barriers to growth and how to overcome them. This includes help with securing finance.

Grants are another source of funding—with the added advantage that they don’t need to be paid back. These are available from a variety of sources, including the government, EU, Regional Development Agencies, Business Link, local authorities and some charities. The Business finance support finder highlights advice and help on offer in your area.

Note: Where a business is a limited company, it may be possible to raise money under the Enterprise Investment Scheme. This scheme helps smaller high-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in these companies.

Mortgages

Mortgages for commercial premises may be available from banks and building societies, and largely operate in the same way as a residential mortgage, with fixed or variable interest rates. Rates are often determined on an individual basis. It may be a good idea to use a specialist broker, who can assist in finding the best deal.

With commercial mortgages, the lender has a legal claim over the property until the loan has been repaid in full.

Getting legal advice

Need help finding a financial solicitor near you? LawyerLocator covers all of the UK from major cities like London, Manchester and Birmingham to small towns in the countryside.

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