Sign of the times: Equity Investment and Investment Property Financing

Ten years ago banks weren't as fussy as they are today to lend you money. It was relatively straightforward when the figures looked promising to raise some capital.

Today it's a lot different. Banks have drastically tightened up on lending and no matter what the government seems to promise, getting funding is not only extremely hard to get, but when you do is very costly.

Especially for first time investors, banks today are looking for equity investments prior making any kind of lending decision. This helps to preserve the Bank's security as if the lender should fail to meet repayments and the Bank has to foreclose, their initial loss is less.

Let's make up an example, and for ease of working it out make the loan a nice round number, £10,000. Today, a bank or investor may require an equity investment of anything between twenty and fifty percent. That means you would need to invest yourself between £2,000 and £5,000 before the bank would agree to a loan.

Banks prefer equity investment because as in this example, if you defaulted the bank would only need to sell the property for far below the market value to recoup their investment. If they lent to you at fifty percent, they would only have to sell the property for £5,000 to earn back their cost. Also, to a lender, you look much more of a good risk if you yourself are making a considerable personal investment.

Okay, this is a very simplistic example, but it gets across the point. In actuality, you investment may very well be property, life insurance policies or stocks - anything that the bank sees as valid collateral. The point is that banks today need to see your commitment in terms of personal investment. To their eyes, you are far less likely to welch on a deal if you are investing in it yourself to a sizeable degree.

There is a benefit to this. The larger your personal investment, the lower the amount of interest you have to repay is, as your loan is smaller.

Along with your personal investment, banks will also be looking at other criteria when the decide on whether you are a good risk. Credit scores, financial history, history with the specific lender, etc. It's always a good idea to check your credit history with the various credit reference agencies to make sure that no false data has been entered. The last thing you want is for a loan application to fall through due to an error there.

Whether or not this is your first commercial property investment, the bank will also want to see your current financial statement, showing your earnings, assets and liabilities. If you have an accountant, get them to prepare a clear statement.

And above all, always have a good financial presentation, with all the bases covered. The bank will need to see all the facts and figures on how you plan to use their investment and get a good return. Don't even think about approaching a bank unless you know you have a low risk project in your hands

More articles on Commercial Property Investment

Copyright 2011 CommercialInvestmentProperty.org.uk All Rights Reserve