At Advocate Finance, we are seeing about 90% of our clients carrying out their property investment via a Limited Company. Common questions and concerns that our clients raise regarding limited company finance is what security lenders require. Outlined below is brief overview of the different types of security that lenders require.
As with all property transactions, lenders will always ask for a Legal charge over the property and its land. The same as owning a property in your personal name, if you do not pay your mortgage the lender has a legal right to repossess the property.
What are Personal Guarantees?
A personal guarantee is a legal agreement which states that in the event of your company defaulting on the mortgage payment, you as the director/shareholder are liable for any unpaid amounts.
In the event of insolvency, the directors and shareholders that provided personal guarantees can be pursued as they have personally guaranteed the mortgage with the lender meaning they are still tied to the debt.
Specialist lender Shawbrook has recently announced that for SPV limited companies, they will only require limited personal guarantees, which limits directors/shareholders liability to just 25% of the mortgage debt.
This form of security works in the same way as if the mortgage was in your personal name so we see no issue lenders asking for personal guarantees.
Floating charges/Debentures – What are they?
Some lenders take a ‘belt and braces’ approach and ask for a floating charge/debenture in addition to a legal charge over the property and personal guarantees. They are in principle security over all the company’s assets and not just the property and we do not like them.
If you give a lender a floating charge/debenture it can complicate future mortgage applications with new lenders or even prevent them from lending.
Firstly, any new lender looking to lend to the limited company will be required to gain consent from the lender holding the floating charge/debenture. Best case scenario, this will be all that is required.
In certain cases, the new lender may decline a mortgage application because their lending criteria forbids lending where another lender already holds a floating charge over the company’s assets.
More recently, some lenders have moved away from requiring floating charges/debentures and we also try to advise clients against providing them due to the complications they can cause, however on a case by base basis, there may be occasions where the benefits of providing them outweigh the negatives.
If you are looking to invest via a limited company and want to know more about what lenders require and discuss your investment plans, then please contact me today for a free consultation.
Jake Collins – Consultant at Advocate Finance Ltd