Business Borrowing & Your Home Loan

When looking for a loan for your business, it is important to understand the available financing arrangements. It is also an opportunity to consider how your finances can influence your future financial decisions, such as securing a loan for your home.

Like securing a mortgage, your options for obtaining finance for a business or equipment purchase will depend on several factors.

WHAT IS A BUSINESS & EQUIPMENT LOAN?

If this is the first time you have secured a loan for your business, the process can be confusing.

Similar to a mortgage, your Business Loan is funded by a financier (such as a bank). When choosing the right financing option for your business, we need to consider your assets, cash flow, time in business and business goals. These are just some of the factors that will influence what type of loan suits your needs.

Generally speaking, a business loan for a small business requires more information than a personal or car loan.

SO, WHERE DO I START?

The best place to start is understanding your complete financial position, so you don’t over-commit yourself.

To understand your limits for finance and your ability to repay any money you borrow, ask yourself the following questions:

• Do you need the funds up-front or on a needs-basis?

• What is the maximum repayment you can afford?

• How much can you contribute?

• What is your Loan-to-Value Ratio (LVR) going to be?

• What assets do you have to offer if you need collateral (for a secured loan)?

• Who will be willing to guarantee your loan if you need a guarantor?

• How much equity do you have?

If you are purchasing a business for the first time, it may be easier to answer these questions than if you are refinancing or expanding your business. If you are not sure, your Accountant and Mortgage Broker are your team of experts, and we can help you understand your financial position and your options, respectively.

WHAT DOES ‘SECURED’ & ‘UNSECURED’ LOAN MEAN?

Secured and unsecured loans are referring to whether the lender requires some form of security to provide financing.

A secured loan requires a form of security such as a property, inventory, or other assets. If you can’t make repayments, the lender may rely upon using these assets to clear the outstanding balance, interest or fees.

An unsecured loan doesn’t require assets as security. Instead, the lender will typically consider your business cash flow and strengths, such as contracted work and revenue, as adequate to facilitate repayments of your loan.

CAN OWNING MY HOUSE HELP ME GET A BUSINESS LOAN?

In certain circumstances owning your home can affect your capacity for a business loan. For example, if you own your home outright with no mortgage, your lender will most likely accept that as security for your loan. However, the amount a bank will loan isn’t one-to-one with an asset’s value. That is, using as security a home valued at $500k won’t result in a $500k loan.

Why you may consider a secured loan:

• Allow you to borrow against your assets such as property, vehicles and inventory

• Commonly offer lower interest rates and higher borrowing amounts than an unsecured loan

However, a secured loan generally involves a longer approval process, as there’s security to consider. Your lender may require value assessments and additional proof and documentation of assets before they will accept them as security.

Why you may consider an unsecured loan:

• The approval process may be faster as less upfront information is required

• Often use the strength of your cash flow as security instead of physical assets

Unsecured loans are generally for smaller amounts ($100k or less) and tend to have a higher interest rate than secured loans as they are deemed higher risk.

CAN MY BUSINESS LOAN STOP ME FROM GETTING A HOME LOAN?

Generally speaking, a business loan in your name can impact your credit history just like any other loan. And your credit rating is a significant factor in the mortgage approval process.

Late and non-repayments of your Business Loan can negatively affect your credit score, which in turn can impact the financing options available for your Mortgage.

Similarly, a poor credit rating from your personal loans may affect your options when securing a Business Loan.

If you have used other assets to secure your Business Loans or have large outstanding loans, these can affect how much your financier may be willing to lend you for your Mortgage.

There are several considerations when borrowing for your business, but we can help you find options that suit your finances, goal and budget.

Our experienced team are experts in securing Business & Equipment Loans. Speak with us today to ensure you have a thorough understanding of the process and the considerations that could affect your ability to secure a loan.

Disclaimer:

Terms are subject to approved persons only. This information is true and correct as of 8/09/2021. All of the content above is general in nature and may not suit your personal needs, situation objective & goals.