A business equity loan is a type of secured business loan. With it, you can use the equity in your home or commercial real estate as security against a business loan. This will give you access to lower interest rates. These loans are available for both established and new businesses.
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Borrow up to $300,000 with an unsecured business loan from Lumi.
Like a secured loan, an equity loan will require you to put up property as security to take out the loan. This can include residential or commercial real estate. The difference between an average secured loan and an equity loan is that you don’t have to own the property outright. Instead, you can use the amount of equity you own in the property to secure the loan.
Unlike other business loans, equity loans are available to new businesses granted you submit a detailed business plan as part of your application.
Like home loans, business equity loans may offer various features. These can include variable and fixed rate loan options, redraw facilities and interest-only repayments.
As with a secured loan, you run the risk of losing your property if you default the loan.
How do I know how much equity I have in my property?
Equity is the difference between your property's value and any debt you hold against it.
Most equity loans allow you to borrow up to 80% of your property’s value minus the debt you hold against it. If your residential property is worth $500,000, this means that you’ll be able to borrow $400,000 (i.e. 80% of the property’s value). If you’ve already paid off $300,000, you'll have $200,000 left on your mortgage. Once you subtract $400,000 with what you owe, you’ll be left with $200,000, which is the equity you can use against your property. To simplify:
80% of a $500,000 home = $400,000
The amount of debt on the property = $200,000
Value minus debt = $200,000
You may need a property valuation to know exactly how much equity you have.
What are the pros and cons of business equity loans?
Pros
Discounted rate. As this loan is secured against your property, the risk to the lender is less. This can incentivise it to give you discounted rates and fees on your loan.
Access. Unlike other business loans, this loan can be used to finance a new business. Most business loans will have requirements around age and turnover of your business, which can be a barrier for young businesses looking for funding.
Varied loan amounts. Some lenders offer a wide range of loan amounts. This means that you can use the funds to start a small or large business, as you require.
Cons
Risk of repossession. If you default on your loan, the lender can repossess and sell your property to cover its costs.
Limited to how much equity you have. How much you’re able to borrow will depend on the equity you hold in your property. It may not meet your needs and you could find it limiting.
What mistakes should I avoid?
Having no business plan. If your business is new, you will need to provide a detailed business plan to get approval for a business equity loan.
Not comparing lenders. You don’t have to take out the equity loan with the same lender as your mortgage. It’s worth researching and comparing a number of lenders and options to find the right loan for you.
Borrowing more than you can afford. Ultimately, you have to pay back the loan. Borrowing more than you can afford can have severe consequences if you default.
How do I compare business equity loans?
Property type. Some lenders may prefer residential property to commercial property, while some may let you use either. Shortlist lenders based on the type of property they are willing to secure.
Loan to value of equity. How much you can borrow will depend on a percentage of the value of equity in your property. This percentage may vary for commercial and residential properties, your credit history and the lender itself.
Interest rates. Equity loans generally have higher interest rates than home loans. This is because the lender is taking a higher risk with a business loan. By comparing lenders, you may be able to find a more competitive loan.
Loan amount and loan terms. Generally, loan amounts vary from between $5,000 and $1,000,000, with loan terms of 3 months to 20 years. Check the minimum and maximum loan amounts and terms offered by the lender before you apply. How much you’re approved for will depend on your business proposal (if you’re a new business), your financial circumstances and the amount of security you’re offering.
Additional features. Some lenders may also offer additional features with equity loans. These include redraw facilities, a split loan option and interest-only repayments. Remember to check if there are any fees associated with these features.
How can I apply for a business equity loan?
👁 Compare lenders and loans. Look at the fees, terms and lender’s conditions and find a loan that suits you. 🔍 Once you’ve settled on a lender from the table above, click “Go to site” to visit the lender’s website. ✍ You can submit an online application. Keep all the documents required handy. This will speed up the process.
Need to manage cash flow?
If your business has outstanding invoices, invoice financing may be an option for you. It's a type of business loan that comes with reduced risk and no asset requirements or interest payments.
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Frequently asked questions
You can take out a loan for an investment property on behalf of a business. But some lenders may not let you take out an equity loan if you’re an individual investing in property.
Different lenders may have different restrictions. You will also be required to carry out a valuation on the property prior to approval.
This will depend on the lender, but in general, yes. You will have to provide their details when you apply.
Jeremy Cabral is the chief operating officer and global head of publishing for Finder. He has written hundreds of comparisons covering everything from credit cards to travel money to Netflix TV shows. Jeremy has a Bachelor of Business (Marketing) from the University of Western Sydney.
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