What Kind of Security Do Financial Providers Require When Lending to Limited Companies?
There are a lot of terms to get your head around when it comes to borrowing via a limited company. What’s the difference between a fixed charge and a floating one? Do you know your debentures from your personal guarantees? To keep things simple, we’ve compiled a shortlist of all of the ways in which a financial provider might ask for security when applying for a buy-to-let mortgage via a limited company.
First charge and a personal guarantee
In this scenario, the mortgage provider will assess the application from a limited company in much the same way as they might with any individual applicant. The provider will apply a first charge to the property and will demand an unsecured personal guarantee from each director on the board of the limited company.
At present, there are several different mortgage providers who accept this kind of security from Special Purpose Vehicle (SPV) limited companies, but only one (Keystone Property Finance) does so for limited companies which are still trading.
First charge, personal guarantee and a floating charge
As well as requiring a first charge and a personal guarantee, some mortgage providers may also a apply a floating charge over the limited company’s assets. This constitutes an equitable charge which normally covers all assets of the limited company in question, both those currently held at the time of application and any acquired in the future.
In this arrangement, the limited company can handle its own assets on a day-to-day basis without consulting the provider and the floating charge only becomes a fixed one (a process known as “crystallisation”) if the limited company goes into administration, liquidation or defaults on the repayment of the loan.
For the most part, floating charges will take the form of a debenture, especially when the limited company in question is a trading one. A debenture is a document which clarifies all of the terms and conditions of the financial arrangement, including the floating charge, and gives the mortgage provider the option to assign an administrator to the case if necessary.
Debentures are important because they may restrict the limited company’s capacity to borrow from other providers at a later date. For example, if a limited company enters into a mortgage arrangement with a provider that takes out a floating charge on the company’s assets as part of its security, they may run into problems if they wish to seek another mortgage from a different provider for a second property.
In the best-case scenario, the new provider may write to the initial provider asking them to confirm that they do not plan to crystalise the floating charge; this kind of confirmation is termed a “letter of non-crystallisation”. However, in the worst-case scenario, the new provider may decline the mortgage application on the grounds that they do not lend to limited companies whose assets already have a floating charge from another provider.
Calling in the professionals
For any landlord who wishes to apply for a buy-to-let mortgage via a limited company, it can be difficult to understand which provider offers the best deals for your unique circumstances. That’s why contacting a specialist broker, with extensive experience in the buy-to-let market, is an advisable step in ensuring you find the product that’s right for you.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.