Borrowing against its assets, including any real property it owns, is one of the most important ways a company can raise general finance and working capital. So, even in the current challenging economic environment, it is essential that directors keep the option of raising finance in through property under review.

Legal Mortgages
One of the most common ways for a company to raise finance through property is a legal mortgage. Lenders usually use a legal mortgage when property can be used as collateral; and particularly if the property is essential to the continued operation of the business.

Raising finance in this way has several advantages for a company, these include:

• The potential to make a substantial capital gain from market rises
• The retention of ownership of the property – other investment options may involve giving up some, or all of your ownership
• You may be able to let or sublet the property, with the lender’s consent
• Generally, mortgages carry lower interest rates than unsecured loans or overdrafts
• Mortgage interest rates can be fixed. This helps cash flow to be managed and forecast more accurately.

However, the benefits need to be weighed against the disadvantages of this approach:

• The potential for loss of capital if market values reduce
• The cost of the deposit (if the property is being purchased), insurance, security and maintenance of the property
• If the mortgage is on a variable interest rate, you could expose yourself to cash flow difficulties if rates increase significantly
• It may be more difficult to move your business if you own the premises rather than if you just rent them.


Floating Charges
On some occasions a legal charge cannot be used. For example, if the company only has an equitable interest in the property or, if the property is leasehold and the lease contains a prohibition on charging. In these situations a lender may look at other ways of using the property as security, for example taking a floating charge.

A floating charge is appropriate to assets and material subject to change on a day to day basis, such as stock. The charge applies to the company’s assets generally and is not fixed on a particular property. With a floating charge a borrower can still sell assets without obtaining the lender’s consent on each sale.

In reality, lenders may take both fixed and floating charges - with the floating charges capturing assets not caught by specific fixed charges. The floating charge will provide that if a specified event occurs, it will crystallise, converting into a fixed charge over the assets which it covers at that time and the borrower can no longer dispose of them.

While property assets can offer an attractive and efficient means of raising funds, it is essential that companies take professional advice on the lender’s documentation to ensure that they full understand it and are clear about the implications for their business.

Karen Beales is a solicitor in the Property Finance Team at Howes Percival LLP in Norwich.