We work with a considerable number of entrepreneurs at Enness, and they probably make up one of our most significant segment. Those who are making their very first steps into self-employment through to a full sale of their business. For me, they are my favourite client type – they are creative, business-minded, ambitious, and more often than not always trying to borrow as much as humanly possible.
We have been fortunate enough to work with some of the finest entrepreneurs of the last 50 years. Those who have started their business from scratch (and where we cobble together their first mortgage) through to the other end, when they exit for hundreds of millions of pounds (and we continue to help them find the right finance).
Here are some of the steps in the entrepreneurial lifecycle, some tips and tricks and how we can help.
The "I'm thinking about starting a business" stage
Here is the dreaming and planning phase where research is in its full flow, business plans are aplenty, and maybe there is some fundraising taking part as well. This part often takes place during lunch hours at work and sat at the kitchen table, and often the would-be entrepreneur is simultaneously working full time.
If you are at this stage and planning to start a business, you must look at your mortgage plans at the same time. If you are employed, this may be the last time for a while where you have a steady, provable income with tidy bank statements and a file of P60s with steadily increasing income figures to rely upon.
Here are a few things to consider – doing them as early as possible is essential, as is getting expert advice:
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If you already own a property with a mortgage, you should look at your terms – if your rate expires during the first one or two years of your new business think about fixing your rate to cover that period.
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With all businesses, cash is king, considering reducing your cashflow commitments with an interest-only mortgage or extending your mortgage terms to lower your monthly costs, for example. An interest-only mortgage may cost you more interest over the long run, but it may be a sensible approach on the broader view and if used correctly.
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If you own a property, there may be an option to release some of the equity via a re-mortgage based on your current employed income. Many lenders are uncomfortable lending "for business purposes", and you will always need to be clear if you expect your income profile to change. However, this money may be the cheapest you can raise and the key to getting your business funded.
Using your home as security for any loan is risky, especially when it comes to starting a new business where the concept is unproven – think carefully, don't over-leverage and take advice.
The same goes for buy to let mortgages – here and more than ever before lenders look beyond the property and rental income of the property to the income and assets of the person taking the mortgage. If you have buy-to-lets and a steady income, make sure you review all of these before you resign from your job.
The first year of a new business stage
Some business ideas start perfect and gain traction straight away. Ones which cure Covid-19, create huge returns for no risk or perhaps moving from a profession to going out alone. Others, however, take a considerable amount of time, luck, and energy to get going.
At this stage, and unless you have tonnes of assets, a guarantor or a trust fund in the background, there are very few lenders who will be willing to help you with a mortgage. You can only, generally, borrow money if you can show how you can make the monthly payments and given that you will be knee-deep in trying to get invoices paid, get the printer to work and everything else in between, the one thing you won't have is income.
The general rule of thumb is you need to have at least 12 months of trading, one set of accounts and one tax return in hand before will be able to apply for a mortgage and even then its strict. There are exceptions, pre-paying interest, guarantors, joint mortgage sole proprietor and other mechanics available to some people, but in the main, it's hard to get a mortgage in year one.
If you have a mortgage, many lenders will 'switch' you onto a new product without any underwriting or often a valuation. With the right approach moving to interest only, extending mortgage terms or even payment holiday's can be available – but there are ramifications to all of these.
Even getting a mortgage or a re-mortgage on buy to let will be more challenging than you are used to. Some B2L lenders don't have a minimum personal income criterion, but the overwhelming majority do need some income to be proven – and that will again be your first year's tax returns.
Unless there is a problem, something unexpected happens, or the launch of the business happened without the proper pre-planning, you and Enness are goings to have a year-off talking to each other.
The second-year
The second year of entrepreneurship will go one of two ways. Either an extension of year one, where buying a property will be way down on your to-do list, or your performance will happily enthuse you, and you will be thinking about what to buy with your success.
As before, lenders will need to see a minimum of 12 months of trading history before they will consider offering a mortgage. Your accounts (net profit before tax) or how much you have personally taken from the business in salary and dividends as demonstrated on your tax return will determine the number on which your salary multiple will be based.
There are only a handful of lenders who will consider borrowers in this position. It may therefore be an ideal to hold off applying for a mortgage a little longer if you can – you will have more options with two or more years history behind you.
You can make this period as short as possible by, for example:
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Preparing draft accounts as soon as your financial year ends and asking a lender to work off that.
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Preparing and submitting your final accounts as fast as you possibly can after your year-end rather than waiting until they are due (9 months after financial year-end).
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Perhaps shortening your accounting period if that will give an advantage in how your application is presented.
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Submit your tax return earlier than the deadline – you don't have to wait until January to do this and preparing and submitting earlier could be advantageous.
We will always work with you and your accountant to work out a strategy on how and when to prepare accounts and how you should pay your self via the business for maximum effect – planning this as early as possible is vital.
Just remember, business expenses, items charged through your business, directors loan repayments, company cars and other benefits will rarely be used as "income" as far as mortgage lenders are concerned.
When things are not going great
There are times when businesses, for a whole host of reasons, don't perform very well – the economy, customers not paying, problem hires, competitors and a million other reasons.
And there are lots of things that business owners do with their businesses which affect profit: expansion, fundraising, restructuring and plenty more reasons.
Thinking about how these will affect your ability to apply for a mortgage is essential, and with everything timing is vital.
For example:
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Lenders can look at your accounts in several ways – last year only, an average of last 2 or 3 years, last year with a projection supported by evidence.
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Some lenders will take the time to understand performance changes, i.e. if there was a one-off event which caused a drop in net profit, a big purchase or investment for example, which may help achieve the result you need.
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Your "income" can be assessed as your percentage of net profit, net profit plus salary added back, your salary and dividends and so on – so finding a lender that will accept your optimum position is valuable.
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Accounting years are sometimes different from financial years, and planning to submit a mortgage at the exact right time can help achieve the best possible result.
So, as you can see, and with mortgages for entrepreneurs and business owners in general, presentation, timing and speaking to the best lender at the exact right time is the key to success, even when things aren't going as well as they should be.
You have a mortgage and the product you are on is ending during a period where your company performance of personal income is not high enough to re-mortgage to another lender always speak to your current lender. It is often the case, especially with the mainstream lenders that you can switch to another product without a full underwriting or assessment of your circumstances being required by the bank.
Other, more extreme examples if your business needs funding:
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There is an excellent selection of niche and alternative lenders who will lend into businesses of all sizes and shapes for all manner of reasons.
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There is an equal number of lenders who will offer second charge mortgages against the property you own for business purposes.
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Regulated bridging finance, a bridging loan against your home, can be used to access liquidity required to solve a business problem.
All of these need to be approached with caution and a short- and medium-term plan needs to be put in place to cover all eventualities.
We have an experienced team of expert bridging loan brokers who focus on this area and can add some real advice and insight to any situation.
When things are going great
When businesses start to find their pace and take off its natural that the business owners, who have put in the money, stress and effort to build the business, start to think about how they can enjoy their success. In most cases, that turns to investment in property. The main points of interest and a few inherent tensions are as follows.
Maximising how much can be borrowed based on timing
As explained above – how much an entrepreneur can borrow is a direct result of the performance of the business and how and when that is demonstrated. The rule of thumb is the well-used "four and half times income" however the question begs an answer to how income is defined. At this stage in a businesses life, the founders will often want to achieve as full a mortgage as possible based on the business performance AND their unique view on what the future looks like, and will often look to stretch their borrowings as much as possible. However, conversely, lenders will be assessing performance historically – the last 2-3 years accounts and tax returns!
At the same time, there will also be a tension between taking money out of the business to show a full income (triggering an income tax charge) vs keeping it in the company, not paying tax and having a smaller income declared on a personal tax return.
Balancing these points is an art which we are masters at.
Minimising personal tax vs taking money out of the business
At the same time as borrowing as much as possible, it's also quite common that the founder of a business will want to borrow as high a value as a purchase as possible so to minimise how much cash is taken from the company. Taking money out of a business has two negative consequences. First, it takes cash out of the business which will reduce funds for growth or working capital and secondly it will trigger a tax charge for the shareholder, neither of which is ever a priority.
We have loads of lenders who are specialist in these areas and are more than comfortable building credit applications based on the absolute position, their experience of the market place and with support from accountants, tax advisers and other professionals.
Structural planning and investment stage
When businesses get more mature, start capturing a market and producing sustained results, if it is expected that the structure of the business changes to enhance growth, crystalise value or create succession planning. This is a wide-ranging topic so ill pick a few items and explain how they affect the ability to secure a personal mortgage.
Getting a mortgage after selling the business
If all goes to plan and you decide to cash in and sell your business ad after tonnes of stress and due-diligence the deal closes and instantly your ability to secure a mortgage change again, but for the worse. Amazingly, very few lenders will give you a mortgage at this stage as you have just sold the thing that gave you the income you need to get a mortgage! Here are a few of the more common outcomes and some of the subtle differences.
Minority sale
If you sell a minority interest in your business, your shareholding will reduce and as a direct result, so will your share of net profit or dividends. If your shareholding reduces to under 25% or in some cases, 15%, lenders may only use your salary and dividends rather than your share of net profit.
If the sale proceeds are reinvested into the business as a part of the sale, there may follow a period of growth and expansion which will result in increased spend, re-invested profits and a reduced net profit – all of which can affect your mortgage capacity. Hopefully, however, there will be some "cash off the table" as part of the sale!
Full or partial earn-out
If the deal to sell is based on an earn-out agreement again your ability to borrow money personally may drop.
Lenders will be very unlikely to take your earn-out returns into their income calculations (they are a capital gain rather than income, and possibly based on future performance which may be unpredictable). Your income, for the purpose of a mortgage application, may therefore be based only on any employed income received as part of the transaction.
Also, if your earn-out is short or fixed its possible that lenders won't even accept any employed income given its short and defined duration.
Share swap or sell to a listed business in return for shares in the acquiring company
This is similar to the above in that your income will likely be your employed income only.
You may have an added benefit of a bunch of shares in the new company which, if listed and with decent liquidity, you may be able to use as AUM with a lender or perhaps secure a loan with the shares as collateral.
Full cash sale or post-earn-out
If you are lucky to sell your business in full, for cash, and you are not committed any further to your previous business you may well be in an 'asset rich, income poor" position for the first time.
Here, all the banks that you used to talk to now have next to zero interest in you, replaced by a new set of banks who will bend over backwards to speak to you (and "look after" your new-found wealth).
Mortgages here will be based on one or more of a few things:
HNW exemption
Under the FCA rules, if you have over £3m in net assets, you can opt-out of specific regulations which means the lender can change how they make lending decisions – effectively if you are certified HNW you banks can lend to you without an overzealous analysis If your income and mortgage affordability.
Cash burn
Some lenders will look at your total assets and lend to you based on the expected returns on your liquid investments if invested reasonably or based on if you used your capital to repay the interest. These are ways in which the lender can justify the reasonableness of the loan they make to you.
Pre-paid or rolled-up income
Another approach is by pre-paying (or rolling up) interest due on a mortgage and paying it upfront (or when you repay the mortgage in full).
For example, a 1 million pound mortgage at a 2% interest rate over a three-year term equals £60k of interest. Some lenders will look less at your income if you pay the interest due upfront. There will keen focus during the credit application on whether you have the income to support your lifestyle and how you will pay the loan off at the end of the three years. This is a handy tool for people who have exited businesses and are planning their next venture.
Assets under management
This is a mixture of the above, and some lenders will look on your credit application more favourably if you can place the proceeds of your sale with them to manage or as security for a loan in addition to the property. Tieing up cash as part of a mortgage application may not be the best solution, especially if you have plans to build another enterprise.
Loan against the assets
Then, of course, there are loans against cash, investment portfolios, shares in listed companies earned in the earn-out and so on which can be used as part of the security package for a loan.
As you can see, this part of the market is far removed from the usual 5X income calculations. We are very active in this space, and our experience, access, knowledge and negotiation position creates excellent results.
From here on in a million different options come up – new businesses, property portfolios, overseas properties, car loans and so on.
I have worked personally with hundreds of entrepreneurs, supporting them through this cycle (and round again) and from those who sell to retire through to the awe-inspiring few who sell their built from a scratch business for hundreds of millions of pounds. As I said, it's my favourite part of the market. Read more about securities-backed Lombard finance.
