Which is a more viable option for a vehicle recycling operator? Owning your own premises or paying rent? In part one of this finance series, Martin Cook, Director at Exel Finance, provides ATF Professional readers with his expertise in the processes and obstacles that vehicle recyclers can sometimes face when looking to secure a loan.
The answer for most business owners is obvious – they want to own their own premises? Why? Renting is dead money, and for an equivalent payment or even a lower outlay, you could own an asset that will only appreciate in value over the medium to long term. Furthermore, after you stop working, it could also provide you with an attractive additional income in retirement.
But how can I buy my own premises, you might ask. If you are currently renting and you like your premises, you could ask your landlord if he is interested in selling it to you. Alternatively, you may want to move into bigger or more suitable premises and could look at premises for sale rather than to let. Either way, you will need a commercial mortgage to buy your own premises. Here we need to make a distinction – you would not be applying for a mortgage for investment purposes but as an owner-occupier, and therefore, you don’t need to have any previous experience as a landlord. Lenders are very comfortable with business owners taking out a mortgage to buy their own premises.
How much could you borrow? Most lenders will lend up to 70% of the purchase price or valuation, whichever is the lower. It is possible to get higher loans, but you would be wise to expect to raise at least 30% of the purchase price by way of a deposit.
It is important to understand that lenders are very cautious and need four essential criteria to be aligned before they will consider making you a mortgage offer.
Firstly, they want to be sure that the property their loan is secured on is mortgageable.
Secondly, they have to be convinced that your profits after making certain adjustments are more than adequate to service the loan.
Thirdly, they will want to look at your personal credit standing to ensure you have a track record of both taking credit and consistently paying for that credit every month – no defaults, no CCJs and no bankruptcies; Some adverse credit may be acceptable.
Finally, they need to be comfortable with the industry you are working in.
Some industries will not be considered by any lender. For example, during the COVID-19 pandemic, lenders would not consider mortgages for non-essential retail premises.
So what about your industry? It is a very good question. In my experience, certain high street lenders will not consider loans for businesses in the vehicle recycling industry. One lender stated that the concern was over land pollution.
I submitted an application for a commercial mortgage on behalf of a client who ticked all the boxes: good security, adequate and consistent profits, and a clean credit history. But when a senior underwriter reviewed the application, I received this response:
“This type of business is classed as being part of a High-Risk Industry within our lending policy so we exercise extra caution when assessing these types of cases and this would not be within our lending appetite at the moment”.
Which was a polite way of declining the case. I took issue with the ‘High-Risk Industry’ classification, and so I decided to appeal. I took on the challenge to educate the underwriter as to the fact that the recycling industry is highly regulated, makes two significant contributions to society and should not be penalised because of an incorrect and outdated perception.
In my appeal, I made the following points amongst others:
- Strenuous efforts and strict procedures are followed to ensure there is never any risk of even an approach to any kind of land contamination.
- Furthermore, my client is not a car breaker or a scrap dealer, but a green parts distributor selling clean, guaranteed and certified parts at up to 75% less than the RRP for new parts. Thus far from polluting land, my client actually makes a great contribution to the environment by helping to reduce CO2 emissions by avoiding the unnecessary production of new parts.
- In addition, all green parts distributors help to reduce the spiralling cost of motor insurance claims and thus motor insurance premiums for members of the public.
I am pleased to say that the original decision was overturned, and we got a commercial mortgage offer for the full amount we applied for and at a competitive interest rate.
It is sad to relate that some lenders have an outdated and incorrect perception of the vehicle recycling industry. But as long as you can tick all the boxes, are compliant in following correct procedures and have licences and regular audits, there are some lenders out there that will welcome your business.
Look out for part two of this series – How much can I borrow based on my profits, and what will a commercial mortgage cost me?
If you would like to get in touch with Martin, please email him at email@example.com