29 May 2018
In the first part of his series on veterinary practice funding, Gary Hemming discusses the basic financial requirements of buying or refinancing a practice and the options for commercial mortgages.
Gary Hemming
Job Title
"Where possible, reducing the term of the loan, or making regular overpayments, can result in large interest savings." Image © Andy Dean / Adobe Stock
Veterinary practices are extremely popular with lenders and as the industry is considered a safe bet, funding may be easier to acquire than you may imagine. With the commercial funding market continuing to evolve, vets are well placed to benefit from increased competition between lenders.
As the commercial finance market grows, plenty of new and innovative products are available to choose from, although this increased selection of products is great for borrowers, it can make the process of finding the right funding for your business confusing.
We will break down the different funding options available to the veterinary industry, including how the products work, what costs to expect, how long the application process will take and situations they should be considered for.
The first area to consider is the purchase of a veterinary practice. This is covered using property-backed debt, which, in the commercial finance market, usually means a commercial mortgage. Commercial mortgages can be used for several reasons, not just for purchasing new premises.
When somebody is selling an existing practice, as well as the building, the trading business is often sold with it as the current owner plans to exit the business altogether. In such situations, a value is usually assigned to both the practice as a business and the premises it trades from. The value of these elements combined is referred to as the “going concern” value.
As veterinary practices are popular with lenders, the deposit needed can be as little as 10% of the going concern value. This means the lender will often lend more than the value of the building you’re buying, as long as it is 90% or less of the going concern value.
The amount you can borrow will depend on the profitability of the business and its ability to keep up repayments on the new commercial mortgage.
If you have an existing practice and wish to expand into a second site, funding for the acquisition of a new building can potentially be at 100% loan to value. This means you don’t need to put down a deposit, and VAT due on the purchase can also often be 100% financed.
This provides an opportunity for expansion not available to most industries, with most industries capped at anywhere between 65% and 80% loan to value. Of course, other costs are associated with opening a new practice, but by removing a property deposit costs are much lower than other industries.
The application will rely on the strength of the existing business and the affordability of the loan. Where a small shortfall in affordability exists, projected income may be taken into account based on the new practice’s projected trading performance.
If you already own a veterinary practice and are looking to raise, or save money, commercial mortgages can be used to remortgage your current property. You would want to do this for three main reasons: to reduce your interest rate, to reduce total interest charges or to raise additional capital. Whatever your reasons for looking into a refinance, the products offered will remain largely the same.
When refinancing using a commercial mortgage, the interest rate offered will often be lower than other types of finance. Although this is appealing, it can be quickly offset by the temptation to borrow the money over a longer term to keep the repayments low. The longer the term chosen, the lower the monthly repayments will be; however, as the term increases so does the total cost of borrowing.
When looking to refinance your practice, it is possible to borrow up to 100% of the property’s value.
Commercial mortgages are usually available from £26,000 – with no maximum loan. Lenders will often accept terms from 5 to 25 years, and the borrowing can be taken out on an interest only or capital repayment basis.
Interest rates start from 2.25%, but a rate of between 3% to 4% is more common as an average for a veterinary practice. Where funding is required on a long-term, interest-only basis, the interest rate will often rise above 5%. This often means the difference in monthly repayments between repayment and interest only commercial mortgages is minimal for vets.
This flexibility means commercial mortgages are an extremely cheap way of borrowing money in terms of the monthly repayment. Low interest rates and a long repayment term mean low repayments, but the interest will add up over the years, and you may well end up paying more back in the long term. Where possible, reducing the term of the loan, or making regular overpayments, can result in large interest savings.
