June 14th, 2013. Ben Lloyd
Jargon-free finance: commercial funding in layman’s terms
Like many industries, the world of commercial finance is home to a number of phrases, buzzwords and references that make sense to brokers and experts in the field, but can leave business owners and investors a little cold.
Financial Terms Jargon Buster
Here are some popular commercial finance phrases and what they mean for you:
Accounts: Documents, usually prepared annually, that show the turnover of a business. Lenders will assess these when considering an application for finance from businesses.
Adverse credit: When an investor is found to have a bad credit rating, having defaulted on payments in the past. This may make it hard to secure funding, or will affect the amount they can borrow from a commercial mortgage.
Annual Percentage Rate (APR): A method that identifies the true cost of borrowing and is a way to compare with other rates.
Application: The process of applying for funding from commercial lenders.
Authorised guarantee agreement (AGA): Often a requirement for granting a leave, the tenant gives an AGA by assigning the lease which guarantees the performance of the lease obligations which were given to the landlord.
Broker: A third-party who liaises with lenders to find the most competitive finance deals for clients.
Broker fee: A sum that is charged by the broker to the client for his services.
Business rates: This is the tax that a business must pay to cover the costs of local authority services, generally this is based on the rateable value of the property from a specific date which is reassessed on a five year basis.
Buy to let mortgage: A commercial mortgage for a residential property which the investor intends to rent out to tenants.
Bridging finance: A short-term form of finance intended to bridge a gap between buying a property and securing a more competitive, longer-term borrowing.
Brownfield land: A term used to describe previously developed land.
Capital raising: When an investor re-mortgages a property while it’s valued higher than the original purchase price. After the original loan is repaid by the new loan, the capital raised is the amount left over.
Cashback: An incentive offered by some lenders, giving a cash sum when the mortgage is completed or at the start of the process.
Commercial mortgage: A loan secured against a property in order to use for commercial purposes.
Compound interest: Interest that is accrued on top of interest.
Conveyancing: The legal process of transferring ownership of a property. These services are performed by a solicitor.
Conveyancing fee: The charge from solicitors and licensed professionals for conveyancing
Covenants: Terms, including obligations and promised made by landlord or tenant, of the tenancy agreement.
Deposit: Can also be called a bond for rental property. The sum of money paid upfront to secure the property in either a purchase or rental agreement – purchases this amount will be provided through the solicitor while with rentals it is provided directly to the landlord.
Discount rate: When a promotion from a lender puts a mortgage interest rate lower than the average market rate, usually for a set period of time.
Early Repayment Charge (ERC): An amount of money you have to pay if you repay a mortgage before a set time, for instance before the end of an incentive period.
Equity: The amount of capital that you have put in.
Flat over shop: A property that has residential living space above commercial retail premises. Depending on the shop, lenders may be hesitant to provide finance for the property as it may be difficult to guarantee rental income.
Fixed rate: Repaying the same amount on your mortgage over a set period of time.
Freehold: The outright ownership of the land that the property is situation upon.
Funding for Lending Scheme: A Government initiative that loans competitively-priced finance to banks to encourage them in turn to lend to small businesses and investors until 2015. Thanks to the scheme, investors can enjoy below-market interest rates and other perks.
Gross Development Value (GDV): This relates to development lending and is what the projected end value of the completed development will be.
Investment yield: This refers to the annual rent passing as a percentage of the property’s capital value.
Leasehold: Properties situated on land that is owned by the freeholder and are leased are referred to as leasehold – typically these are provided on very long time scales.
London Inter-Bank Offer Rate (Libor): The rate at which banks buy and sell to each other, it is closely linked to the bank base interest rate, which dictates how much mortgages cost.
Loan to Value (LTV): The percentage between the amount of money you borrow (loan) and the cost of the property (value) you want to buy in a mortgage. For example, if the property costs £200,000 and you borrow £170,000, the loan to value is 85%.
National Association of Commercial Finance Brokers (NACFB): The membership body of commercial mortgages providers which self-regulates the industry and promotes best practice.
Profit Margin: Typically delivered in a percentage, this is the profit from the sale of a property after all the expenses have been deducted. Generally the higher this percentage the better this is.
Purchaser’s costs: This encompasses all the costs that the buyer pays including Stamp Duty Land Tax, legal fees, broker costs and survey charges.
Service charge: How much a tenant pays for the services that the landlord provides.
Stamp Duty Land Tax (SDLT): A tax that is payable when buying buildings and property over £150,000 and with annual rent over £1,000. It rises from 1% of a cheaper property’s value to 4% of properties over £500,000.
Standard Variable Rate (SVR): The interest rate charged by your lender, which fluctuates and depends how much you repay on a monthly rate.
Sub-letting: where a tenant lets out part or all of the property to a subtenant in a way that is appropriate due to terms of the lease.
Sub-prime mortgage: Lending designed for those with bad credit.
Term: The length of time before a mortgage must be repaid.
Article By Ben Lloyd
June 14th, 2013
Ben is the Director and Co-Founder of the Pure Group and Managing Director of Pure Property Finance.
Following a career in Barclays, where Ben was in the real estate finance team for 8 years, he decided that the market needed a more forward-thinking type of commercial brokerage so founded Pure Commercial Finance (now Pure Property Finance), the first company within the Pure Group.
Ben has extensive experience across the real estate sector and has participated in over £2bn of real estate transactions during the course of his career.
Ben oversees the general strategy at Pure Group and works with the senior leadership team to drive the Group forward. Ben is also on the Executive Committee of FIBA.See more articles by Ben