FAQs – What Are The Set-Up Costs? – Part Two
We’re continuing a series of blogs we started a couple of weeks ago around what we call FAQs – Frequently Asked Questions.
In our many years of working with clients, we’ve discovered that the same questions get asked on a regular basis.
So, in this series of blogs, we’re providing answers to some of the most commonly asked questions we get from both clients and prospective clients.
This week is part 2 of a question that I started to answer last week. Perhaps our most common FAQ:
What are the set-up costs?
In last week’s blog, I outlined the main set-up costs associated with raising business and commercial finance. These are:
- Valuation costs
- Brokerage fees
- Lender’s arrangement fees
- Lender’s solicitors’ costs
- Your solicitors’ costs.
As I mentioned last week, business finance and commercial mortgages tend to be more complex than say for example a straightforward residential mortgage. Consequently, the set-up costs are structured differently and tend to be higher.
In last week’s blog, I covered the first two from the above list, namely: valuation costs and brokerage fees.
This week I’ll go through the other set up costs on the list, namely: lenders arrangement fees, lenders solicitors’ costs and your own solicitors’ costs.
Lenders Arrangement Fees:
All lenders charge fees. They get called different things, usually either an administration fee, commitment fee or arrangement fee; but they all amount to the same thing – the lender is charging a fee based on a percentage of the loan amount.
The fees to lenders vary but usually range between 1% and 2% of the amount being borrowed. That said, on the odd occasion, the lender’s fee can be less than 1% or more than 2% and this is very much dependent on the lender and the type of deal.
The lender’s fee is normally added to the loan and deducted from the advance at completion, although bear in mind that there are some lenders who will require part of their fee to be paid when you sign and accept an offer of finance.
The reason for this is that the lender is generally looking for a commitment. You will therefore need to have funds available to cover this initial payment to the lender. And bear in mind, that should you pull out of the deal, then any fee that has been paid is likely to be non-refundable.
Lenders Solicitor’s Costs:
This is one of the big differences between business and commercial finance and a residential or buy-to-let mortgage. With residential and buy-to-let mortgages there is very often what is called ‘dual representation’. This means the same solicitor is acting for both the borrower and the lender. And obviously, this can save not only time but also money.
However, when it comes to the more complex nature of business and commercial finance, in the majority of cases, the lender will wish to appoint their own solicitor to act for them. This cost is borne by you as the borrower.
Of course, solicitors’ costs can vary greatly depending on the law firm acting, as well as the size and complexity of the deal. But to give you an idea, on a recent commercial mortgage for £500,000 that we arranged, the lender’s solicitor charged £2,000 + VAT plus disbursements.
One thing to bear in mind. When the solicitors are initially instructed, one of the things your solicitor will be asked to do is to provide an undertaking to the lender’s solicitor for payment of their costs in relation to the deal. This is in case the deal doesn’t proceed; it means that the lender’s legal fees are covered.
In order to give an undertaking, your solicitor will ask you to put them in funds to cover the undertaking they are giving. As a result, you will need to have funds available for this purpose.
Your Solicitor’s Costs:
Your solicitor will of course act for you, and they will provide you with a quote at the outset, to include VAT and any disbursements such as a local authority search, land registry searches and any other searches that are required by the lender.
Your solicitor is likely to quote based on the size of the loan and the complexity of the deal. Again, bear in mind, you may be required to put funds on account for your solicitors, to cover their initial work as well as any searches that they need to have carried out.
Next week is the final FAQ in the series and it’s a question virtually every client asks us: How long will it take?