New data from Begbies Traynor suggests that 2023 will see a significant uptick in businesses going bust. It found that the number of companies in what it terms ‘critical financial distress’ grew by a third (36 per cent) in the last three months of 2022.
Mortgage brokers noted that while some business-owning clients are looking to tap into their property wealth in order to support those businesses, they may struggle to do so due to the attitude of mortgage lenders.
Following your heart, not your head
Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, said that for some clients “emotions rule the roost” when it comes to supporting their business, including putting their house on the line.
He added: “We are seeing an increase in this type of lending when alternatives have been exhausted.”
Justin Moy, managing director of EHF Mortgages, noted that most mainstream mortgage lenders don’t allow for much, if any, business borrowing, but smaller names and specialist lenders are more open to the idea.
“Increasing the home mortgage, and spreading the cost over a longer term, does help out in the short term,” he added, pointing out that many business owners felt they had “no choice at the moment, with added gloom on the horizon”.
Looking for positive purposes
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, pointed out borrowers often have to go through a mortgage lender’s commercial lending team in order to raise funds for their business, which tends to mean higher rates and fees, as well as less favourable terms.
He added: “Even those lenders that do allow customers to raise mortgages for business use would expect this to be for positive purposes; market expansion, capital expenditure to fuel growth, etc. Those looking to borrow against their homes due to tax liabilities, shore up a period of poor performance, or other negative drivers are really going to struggle.”
Austyn Johnson, founder of Mortgages For Actors, pointed to the fact that 2020-21 was one of the highest recorded years for new start-ups, off the back of the pandemic.
“Now we are getting back to the norm, it may be that these startups didn’t work out as well as hoped,” he continued. “Or maybe they just aren’t needed now due to employment being easier found?”
A risky move
Mark Hosker, mortgage adviser at Cyborg Finance, said his firm had not seen an increase in business-owning clients looking to increase their borrowing in order to support their business, noting it can be a “risky move” that leads to “financial hardship” if the business performs poorly.
“It is quite dangerous to access gap funding in this way, and we always advise caution when it comes to using personal assets, such as their home, to fund business investments. Instead, we recommend exploring alternative options.
“We have seen business owners closing their offices and building garden work-from-home spaces as a way to adapt to the new remote work environment.”
Are second charges the answer?
Isaac Fry, mortgage broker at The Second Mortgage Company ‒ a second charge mortgage specialist ‒ said that his firm had seen an increase in applications from clients looking to expand their business operations.
He explained: “For example, we recently received an enquiry from the owner of an electric car leasing company looking to acquire more vehicles for their fleet. Additionally, we are noticing an uptick in business owners looking to buy their own premises.”
Fry emphasised that in these cases, specialist lenders are more likely to approve the loans compared with traditional high street lenders.
