Property-Backed Expansion Loan
How a director used 800,000 of equity in his investment property portfolio to fund a major business expansion, accessing finance at 6.9% that was unavailable unsecured.
“I had equity sitting in my properties doing nothing above the mortgage. Using it to fund the expansion made complete sense, the interest saving versus an unsecured loan more than justified the decision.”
The Scenario
The founder and sole director of a Manchester-based IT managed services business had grown the company from a two-person operation to a 28-person MSP with annual recurring revenue of 2.2m and EBITDA of 410,000. Having identified a strategic opportunity to acquire a smaller competitor, a 12-person MSP with complementary technical specialisms and a non-overlapping customer base, he needed 800,000 to fund the acquisition price and the working capital required to integrate the acquired business.
The Challenge
Unsecured lending of 800,000 was available in the market, with an indicative offer from one lender at 16.5% over 5 years, but the monthly repayment of approximately 20,000 would create significant cash flow pressure during the integration period, when the combined business would be investing in systems unification and team restructuring before synergy benefits materialised. The director owned three buy-to-let properties with a combined value of 1.6m and existing mortgages totalling 620,000, leaving net equity of 980,000, and his accountant suggested that using some of this equity as security could dramatically reduce the rate and the term pressure of the acquisition finance.
The Solution
We assessed the three properties as a combined security pool, where the combined value of 1.6m against existing charges of 620,000 provided 980,000 of net equity, sufficient to support a second charge facility of up to 700,000 at 70% combined LTV, or slightly higher at 72% from specialist lenders. We identified specialist second charge business lenders comfortable with the investment property security and the acquisition purpose, presenting the transaction with a consolidated security schedule, the acquisition terms, and the business's financial history. Two lenders returned competitive terms, and the preferred offer of 800,000 at 6.9% fixed for 3 years, reverting to a variable rate thereafter on a 10-year capital and interest term, gave a monthly repayment of 9,240, compared favourably to the unsecured alternative's 20,000 monthly repayment. RICS valuations on all three properties were completed within two weeks and legal completion took five weeks in total.
The Deal Structure
| Loan Amount | £800,000 |
|---|---|
| Security | Second charge over 3 buy-to-let properties |
| Combined Property Value | £1,600,000 |
| Combined Existing Mortgages | £620,000 |
| Combined LTV (first + second) | 89.9% / 68% (second charge only against equity) |
| Rate | 6.9% fixed for 36 months, then lender SVR |
| Term | 10 years, capital and interest |
| Monthly Repayment | £9,240 |
The Outcome
The acquisition completed five weeks after instruction, and integration of the acquired MSP's 12 staff and 340 customer accounts was completed over a 14-week period. In the 12 months following completion, the combined business generated ARR of 3.1m, an increase of 900,000 on the pre-acquisition run rate and significantly ahead of the business plan submitted to the lender. The director subsequently returned to Doulton Bridging Finance to explore refinancing onto a first charge basis at the 3-year fixed-rate reset date, by which point the equity in the properties and the track record of repayment were expected to support an improved rate. The total interest saving versus the unsecured alternative over the initial 3-year period was approximately 208,000.