Like most advanced economies, the UK has an ageing population, with more than 15.5 million people beyond the age of 60, and 3.2 million over 80, a figure that is projected to quadruple by 2041.
As people get older, they need more assistance to carry out basic activities, and many require the kind of full-time attention that only a care home can provide. This potent mix of ageing citizens and booming demand has seen the UK care home industry mushroom, with revenues reaching £15.9billion in 2021.
Clearly, buying a care home or expanding an existing care facility can make good financial sense. However, instead of using cash, care home finance and mortgages are the best way to fund business growth. Read on to find out more and discover how to fund your care home without piling strain on cashflow.
A care home mortgage is a commercial mortgage used to buy, develop, or refinance a care home. This may mean buying an existing care home, starting from scratch with a new property, expanding an existing facility, or extracting equity for liquid cash.
Care home mortgages function like residential mortgages, where a lender provides a percentage of the purchase price based on LTV (loan-to-value, a comparison of the size of the loan to the value of the property), and the borrower repays the loan in instalments, as either capital + interest, or interest only and a lump sum capital repayment at the end of the loan term – which can be anywhere from 1 – 25 years. However, most other factors of a care home mortgage are unlike the standard residential loan:
The care home industry is regulated by CQC – the Care Quality Commission. They provide star ratings to reveal how well care homes are managed. Ratings for the care home to be mortgaged are a key part of a finance or mortgage application. Lenders will be seeking a high score. Low ratings will usually indicate a problem that may affect the facility’s occupancy levels and therefore, its income and ability to repay the loan.
Even in a period of rising interest rates, financing your care home acquisition or expansion can be the best decision. Spreading costs over time allows inflation to shrink the impact of instalment repayments and you can use your capital for other short-term opportunities or to create a ‘rainy day’ fund for unexpected emergencies. (As seen with the recent COVID-19 pandemic).
Additionally, although they are generally very profitable, care homes are labour-intensive businesses, often with high overhead to care for large numbers of elderly residents. This, plus the fact that only half of care home revenues come from ‘self-funders’ (residents who pay for their care themselves) and the other 50% of income comes from local authorities who may only pay quarterly, can result in erratic cashflow. It therefore makes little sense to constrain working capital by paying cash to start or expand your care home business.
Lastly, financing an acquisition may allow you to buy a bigger care home with higher occupancy rates (a key indicator of profitability), than you could buy using cash. Even though bigger homes with high numbers of occupants will cost more to buy, in the long run, they may be more profitable and less prone to hiccups in the UK long-term care market.
Buying a care home is not the only time that owners and investors may need finance to support their business. Buying expensive equipment or vehicles, developing and extending existing premises, covering cashflow dips or paying tax – they may all require financial support. Fortunately, just like any other business, there are a range of other loans available for care homes. They include:
A long-term loan used to buy or start a care home. Borrow up to 90% of the purchase price, with the property providing security for the loan. Pay the loan back over 1 – 25 years.
Use this type of finance to pay for new construction or re-development of existing care homes. Pay for extensions, car parking space, retrofitting, refurbishment, etc.
A form of lease that can pay for vehicles (like a mini-bus) and new equipment. Use the purchased item while you pay for it. The asset acts as security for the loan.
Short-term borrowing to plug the dips in cashflow. Suitable for almost any day-to-day expense. Pay for supplies and services, distribution costs, maintenance expenditures and more. May be obtained with or without security.
Functions like a bank overdraft. Dip into the available cash pool as and when you need it. Pay back what you borrow as customer payments come in.
Avoid HMRC penalties through late payment of your VAT bill. Short term loans to help you spread the cost over more than a quarter.
Not necessarily, but it helps.
First-time care home operators may successfully obtain finance or a commercial mortgage to buy their care home, but the borrower’s industry experience is often a key consideration in the lender’s decision. They must be confident that the applicant has sufficient experience in the care sector to ensure the home will be well managed.
This means that as well as providing the usual business plan, references, and financial data, first-timers must also prove their ability to run a care home – usually with relevant industry experience as a care manager or similar role, and by providing CQC certification. (Registered care home managers must be of good character, be mentally and physically capable of performing the role and have the necessary skills, qualifications and experience. What constitutes ‘necessary’ skills, qualifications and experience for a registered manager varies from case to case and depends on the nature of the care provision).
As with any loan application, preparation is key. Having all your ducks in a row reduces delay and improves your chances of success:
Each lender will have different criteria and that may affect the documentation they request. However, most care home finance applications will require:
The lender will also conduct standard credit and security checks.
Top tip: Check your personal and business credit scores before you apply. Errors on your report could impact limit your ability to secure the loan you need.
Your business plan and presentation are a central element of your care home mortgage application. Lenders are looking for borrowers who can deliver a successful business outcome. Your cashflow forecasts, budget management plan, staff management plan, marketing plan, care quality mandate, and long-term growth or exit plan are key to securing the loan you need. Where you lack experience or skills to fulfil these objectives, your business plan must reveal how and who you will recruit to support you. In areas where your skills are not strong, such as financial forecasting and projections, it is worth investing in professional assistance to build the information sets you need.
Just as no two care homes are the same, so no two care home mortgages are the same. The type of care facility you are buying, its location, its revenue streams, its levels of existing debt and its cashflow will help to determine the type of loan you need. Matching your requirement to the right loan is critical. It therefore pays to consider all the options before settling on an offer.
Care home finance and mortgages are a niche area, with different rules of application. Borrowers seeking these types of loan may find themselves forever searching and making applications to lender after lender. The delays this can create could cause you to lose the care business you wish to buy. Instead, working with a broker, who can access care home finance and mortgages from a wide range of lenders is a better way to go. No more cold calls and endless demands for information. Simply tell us what you need and leave the rest to us.
Don’t go round the houses looking for the right deal. Find the best rates, the best terms and the best care home finance or mortgages all in one place. Contact Swoop today.
Swoop was amazing! I was looking for refinancing and they were straight onto finding me the best possible option. I would highly recommend them.
Owner, F45 Cambridge
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