Use your residential or commercial property as security for your business loan.
Using your property as security isn’t just reserved for home loans. You can also use any equity you have in your home, or even commercial real estate, as security for a business loan. By doing so, you might be able to take advantage of discounted interest rates and fees from a range of lenders. Find out what’s involved in this process, and how to compare business equity loans to find the right option for you.
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How do business equity loans work?
Business equity loans require you to put up a property as security to take out a business loan, but you don’t have to own the property outright. Rather, you can use the amount of equity you own in the property as security for the loan. For example, if you own a $350,000 property and have $100,000 left to pay on your mortgage, you will have $200,000 of equity in the property, and therefore be able to put up $200,000 worth of security.
As this is a business loan, you will be required to submit a business proposal to the lender who will then determine whether this will be a good investment. Business equity loans offer similar features to home loans, such as variable and fixed rate loan options, interest-only repayments and valuation requirements for the property you will use as security.
Top business loan lenders you can compare
How do I compare business equity loans?
- Property type. Some lenders may only let you use either a residential or commercial property as security, although some may let you use either.
- Loan to value of equity. Lenders will allow you to borrow up to a certain amount of the value of equity in your property — usually up to 80% — and this may also depend whether this is a commercial or residential property.
- Interest rate. Business equity loans may have higher interest rates than home loans due to the higher risk the lender takes on with business loans.You should still compare your options as some lenders will be more competitive than others. You may also have a choice between variable and fixed rate options for business equity loans.
- Loan amount and terms. The loan amount and terms you are approved for will depend on the business proposal you put forward, the financial position you are in, and the amount of security you are able to offer. Still, you will be able to check the minimum and maximum loan amount and terms offered by the lender before you apply.
- Additional features. Some lenders may also offer additional features with business equity loans, such as a split loan option, interest-only repayments, and other features that you may want to take advantage of. Remember to check if there are any fees associated with these features.
The good and the bad of business equity loans
Pros
- Discounted rates. As you are putting up part or all of your property as security, the lender is taking on less of a risk than if it was an unsecured loan, and may offer you discounted rates and fees on your loan.
- Access. These loans give people an way to start a business, who may not have had any ways to access finance before this.
- Varied loan amount. Some lenders offer a wide range of loan amounts, giving options for people who want to start small or large businesses.
Cons
- Risk. Using your residential or commercial property as security comes with inherent risks, especially with a business loan. If you default on the loan, your property may be taken by the lender to recoup their losses.
Risks you should beware of
As business equity loans require you to put up your own property as security, they are a risky endeavor to take on. Because of this, you may want to avoid applying for one of these loans without having an air-tight business plan.
You may also want to avoid taking on a business equity loan if you’re not in a secure financial situation. This is because if, for any reason, you find yourself unable to make repayments on your business loan, you may find yourself losing your property and also with no income. These loans are risky, so make sure you consider the risks before you apply.
Not sure if a business equity loan is right for you? Compare secured vs. unsecured business loans