A few days ago I talked about the reasons to use a broker and the massive depth and diversity of commercial finance lenders. So following on from this I thought it might be useful to outline whats important to lenders.
There’s some fairly obvious stuff that most people know, in particular that one’s credit record must be good (for majority of lenders). Additionally, many lenders expect clients to show some experience and credibility in their chosen business area, including with investment and development property transactions.
Beyond this, clients often focus on loan to value (“LTV”), and assume that this is the main factor driving a positive lender decision. But in fact, whilst important, this is almost a secondary criteria. The big thing lenders (and therefore ourselves) consider is the extent of the income arising from the clients business, or alternatively from rents if the property to be mortgaged is an investment. And this income is calculated after working out a clients personal needs as well – either via salary or dividends or both. Lenders calculate the extent that such residual income covers the loan repayments. This is known as “debt service cover” (“DSC”).
Which takes us to a big reason for high street Banks perceived cautiousness. Because those high street lenders tend to seek really high levels of DSC – typically 200% or more based on full repayment loan profiles and not just an interest only basis.
Compare this to the more acquisitive challenger Banks who might seek 125% to 150% DSC based on an interest only scenario. So they have a much larger appetite for the quantum of funding against any particular asset.
Its also very often the case that the level of income derived from profits or rents is the major limiting factor on how much a client can borrow. Frequently, we see cases where clients are limited on LTV because of limited DSC, and not because of a lenders policy on maximum LTV.
The diversity and depth of the commercial finance market means that there are many variations on permitted minimum DSC, which combined with those lenders requirements on clients wider profile means that a properly trained and experienced professional is needed to consider the best (and doable) finance options for clients.
Needless to say those trained and experienced professionals can be found across the Team at key commercial Finance!