When arranging commercial finance, much of the initial attention naturally falls on getting the funding in place.
How much can be borrowed? What will it cost? What security will the lender require? Can the facility complete within the required timeframe?
All important questions.
But there is another question we believe should be considered before the debt is agreed:
How will the borrower ultimately exit the facility?
Because securing commercial finance is only the beginning. The structure also needs to make sense when the debt needs to be repaid, refinanced or replaced.
The Exit Should Influence The Structure From Day One
Different borrowing requirements call for different exit strategies.
A property investor may intend to refinance once an asset has been improved and stabilised.
A developer may expect to repay the facility through the sale of completed units.
A business owner may be borrowing against commercial property with the intention of refinancing onto longer-term debt.
Another borrower may expect a future business sale, asset disposal or other liquidity event.
Each creates a different risk profile.
The important point is that the proposed exit should not be treated as something to consider towards the end of the loan.
It should help determine whether the borrowing is appropriate at the outset.
A Credible Exit Needs To Be More Than An Intention
There is an important difference between having an exit strategy and simply expecting something to happen.
“We will refinance” is not, on its own, a complete strategy.
What will support that refinance?
Will the property generate sufficient income?
Will the business be able to service the future debt?
Could the borrower’s circumstances change?
Will the anticipated loan-to-value remain realistic?
What happens if values, rates or lender appetite move against the borrower?
Commercial lenders will want to understand the credibility of the exit, but borrowers should be asking themselves the same questions.
Refinancing Risk Can Be Underestimated
A facility may be entirely appropriate today and considerably more difficult to refinance several years later.
Commercial property values can change. Interest rates can move. Trading performance can fluctuate. Lending criteria can tighten.
The borrower may also reach the end of the term with a different financial position from the one they had when the facility was arranged.
That is particularly important where the initial structure relies on refinancing rather than amortising the debt over time.
The question should therefore not simply be whether refinancing is possible today.
It is whether the structure leaves sufficient resilience if conditions are different when refinancing is actually required.
The Cheapest Debt May Not Create The Strongest Exit
Headline pricing matters, but it should not be considered independently of the wider terms.
A lower-cost facility may come with a shorter term, tighter covenants, greater amortisation requirements or less flexibility around repayment.
Another structure may cost more initially but provide the borrower with additional time or flexibility to execute their strategy.
That does not make more expensive borrowing automatically preferable.
It means the cost of the debt should be considered alongside what the structure allows the borrower to do and how comfortably they can ultimately exit it.
Business Performance Matters Beyond Completion
For owner-occupied commercial property, the exit is closely connected to the underlying business.
A lender may be comfortable with the borrower’s current profitability and debt service position, but the borrower should also consider how sustainable those numbers are over the term.
Could margins change?
Is revenue concentrated?
Are there significant capital requirements ahead?
Could other borrowing affect future affordability?
Understanding the underlying business is therefore important not only for securing the original facility, but for maintaining options later.
Build In More Than One Route Where Possible
A strong commercial borrowing strategy should consider what happens if the preferred exit does not occur as expected.
If the plan is to sell, could the debt be refinanced instead?
If refinancing is the intended route, is there another source of liquidity if lender appetite changes?
If repayment depends on improved trading performance, what happens if that improvement takes longer than anticipated?
Not every transaction will have multiple viable exits.
But where alternatives exist, understanding them before taking on the debt can reduce reliance on a single future event.
Start With The End In Mind
At Henry Dannell, we believe commercial borrowing should be considered across the full life of the facility.
The objective is not simply to secure the capital required today.
It is to understand how the debt supports the borrower’s plans, how it will be serviced along the way and how the borrower expects to exit when the facility reaches the end of its intended life.
That can influence the lender, term, repayment profile and overall structure selected at the outset.
Because with commercial finance, completing the loan is only one part of the strategy.
The strongest borrowing structures are often those where the route out has been considered before the debt goes in.
Commercial lending is subject to individual circumstances, lender criteria and availability. Property offered as security may be at risk if repayments are not maintained.
