Are you a start-up or growing business in need of a loan or finance?
As you set up and grow your company it is likely you will need to consider taking a loan. This might be to fund working capital, stock or book debts, or perhaps for capital equipment. This loan may be secured or unsecured or you may be asked to give a personal guarantee.
Very few people have the money available to buy a property outright for cash so generally a loan is taken from a bank or other lender to finance the purchase.
Your Personal Guarantee
Your personal guarantee means that if your company defaults on the loan, you will be personally liable to pay. If you give a guarantee you may also be asked to secure or collateralise your promise. This is where the lender takes a charge, generally a second charge, over your home.
Here are some things to bear in mind if your company is to take a loan and you are to guarantee it.
- For risky new ventures where losses are projected a loan is unusual. You and the investor should perhaps be thinking of raising equity investment or potentially a convertible loan.
- If you are to give a personal guarantee you will want to make sure it is capped.
- A bank loan to a company will very likely be repayable on demand. Whilst the loan terms may refer to a review date the detailed terms will generally say the bank has the discretion to call the loan in at any time.
- For larger companies you may be able to bargain for a loan that is not payable on demand. In addition to a payment date the loan terms will include financial covenants that your company must meet. The covenants might relate to interest cover (the number of times your annual profits cover the annual interest on the loan) or the level of gearing (the percentage of the loan to your shareholders’ funds or net assets).
- Banks will generally look to take security in the form of a Debenture over the assets of your company. The key feature of a Debenture is that it allows a bank to appoint an Administrator if the company is in default.
Almost all property-related loans are secured, that is, the borrower will be required to grant a mortgage over the property in favour of the lender. This means that in the event that you do not keep up payments on the mortgage, the lender can sell the property and take what the lender is owed from the proceeds of sale.
A mortgage may also:
- Cover all lending you have from the lender and not just the loan to buy the property;
- Restrict the use to which the property can be put;
- Require you to keep the property in a specific standard of repair.
If you breach any of the terms of your mortgage, the lender may be able to force you to sell earlier or spend money reinstating it. You should also note that just because you like the Property you are acquiring, this does not mean that it is acceptable security to the lender. We will advise you early on if this is likely to be the case and will work with you to see if any steps can be taken that will alleviate your lender’s concerns.
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