Care home finance: how purchases and expansion are funded

Care homes are usually funded with a combination of finance, matched to each part of the project: a property loan for the building, development or refurbishment funding for building work, asset finance for equipment and working capital for the early running costs. Few projects use only one product.

That is because a care home is a property, a regulated service and an operating business in one. A lender looking at it will want to understand all three, and the right product follows the need rather than the sector.

Regulation matters because you cannot lawfully run a care home without being registered, and that is part of the picture any lender or adviser will ask about. In England, the Health and Social Care Act 2008 makes it an offence to carry on a regulated activity without being registered, and the 2014 regulations list the activity as the provision of residential accommodation together with nursing or personal care.

The regulator in England is the Care Quality Commission, which GOV.UK says regulates all health and social care services in England, including care homes. In Northern Ireland the Regulation and Quality Improvement Authority monitors and inspects health and social care services. Other UK nations have their own regulators and rules, so check the position for where the home is.

A care home purchase is typically funded with a commercial mortgage, secured on the property. The British Business Bank describes a commercial mortgage as a loan that involves paying a deposit followed by monthly repayments, with variable or fixed interest rates, and distinguishes the owner-occupied type, for a business buying a property for its own use, from commercial buy-to-let.

A business that will run the home itself is in the owner-occupied position. A lender assessing it is likely to look at the property and at the operation: how the business trades or is expected to, the experience of the people running it, its records with the regulator and the borrower’s other debts. Exactly what a lender wants varies, so ask early.

The loan is secured by a charge over the property, which must be registered at Companies House within 21 days beginning the day after it is created. Our guide to secured business loans explains how security works and what is at stake.

Loans secured on commercial premises are not regulated mortgage contracts under the FCA’s guidance, because the property is not used as a dwelling. That does not remove the need to read the terms: the lender can still take the property if the loan is not repaid.

Expansion and refurbishment are usually funded with either a further advance or a new facility secured on the property, or with development finance when the work is substantial. Which one applies depends on how much building work there is and what the finished property will be worth.

• A smaller refurbishment may be funded by asset finance for fixed equipment, or by a loan for the work itself.
• An extension or conversion may need development finance, where money is released in stages as the work is done.
• A gap before a sale or refinance may be bridged with short-term funding, which the British Business Bank describes as a solution for a gap rather than a permanent one.

For a build-led project the lender will want to see how the extra rooms will be paid for and how long the home will run below full capacity while they are registered and filled. That timing gap is a working capital question as much as a property one.

Equipment is usually funded with asset finance, and running costs with working capital finance. The Finance & Leasing Association describes asset finance as leasing and hire purchase solutions for businesses, so the item being paid for is typically the security.

Our guides to hire purchase and equipment finance cover the differences. Capital allowances may be available on some equipment purchases, and the rules are set by HMRC, so ask your accountant.

Working capital matters because a home’s costs, such as wages, start before its income reaches full strength. If income arrives after the costs fall due, a cash flow gap opens. Build the gap into a cash flow forecast before you borrow, so you know how much headroom you need.

Lenders usually ask for security over the property or the equipment, and may ask for a personal guarantee from the directors on top. A personal guarantee is a legally binding agreement that makes the director personally liable if the business defaults.

The British Business Bank advises independent legal advice before anyone signs, and some lenders require a solicitor to witness the guarantee. Our guide to personal guarantees explains what is at risk. If the home is held in a separate property company, the lender may structure security across both, so the legal structure is worth settling with a solicitor before you approach anyone.

Borrowing is the wrong move when the home could not carry the repayments if occupancy or income came in below plan. Repayments are fixed, but a care business’s income can change.

• The property is the security, so missed repayments can put the building and the business at risk together.
• Registration, inspection outcomes or enforcement action can affect how a home operates, and that can affect the income that repays the loan.
• Building work often costs more or takes longer than planned, so allow headroom.
• A personal guarantee puts a director’s own assets at risk.
• Interest and fees mean you repay more than you borrow.

Capzy is a credit broker, not a lender, and is paid by the lender. We can introduce a care business to lenders for asset, property and working capital finance. Our site describes lender-panel figures of up to £2m for asset and property finance, which are not offers, and a larger purchase may fall outside them. If that is the case, we will say so plainly rather than let you wait.

Our page on healthcare finance covers the wider sector. You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and all funding is subject to status and lender criteria. For an overview of who lends what, see the lender directory.