Equity loans require you to put up a property as security to take out the loan. You don't have to own the property outright, but can just use the amount of equity you own in the property. For example, if you own a $350,000 property and have $100,000 left to pay on your mortgage, you will have $250,000 of equity in the property, and therefore be able to put up $250,000 worth of security.
Unlike other business loans, equity loans are available to new businesses provided you submit a detailed business plan as part of your application.
Like home loans, business equity loans may offer features such as variable and fixed rate loan options, redraw facilities, interest-only repayments and valuation requirements for the property you will use as security.
How do I compare these types of 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 percentage of the value of equity in your property. This percentage may vary based on whether you use a commercial or residential property, your credit history and the lender itself.
Interest rate. Equity loans generally have higher interest rates than home loans due to the higher risk the lender takes on with a business. You should still compare your options as some lenders will be more competitive than others and may give you the choice between variable and fixed rate options for equity loans.
Loan amount and terms. The loan amount and terms you are offered will depend on the business proposal you put forward (if you are a new business), your financial position and the amount of security you are able to offer. You will be able to check the minimum and maximum loan amount and terms offered by the lender before you apply. Generally, loan amounts vary from between $5,000 to $1,000,000 with loan terms of three months to twenty years.
Additional features. Some lenders may also offer additional features with equity loans, such as redraw facilities, 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.
Benefits of business equity loans
Discounted rates. As you are putting up part or all of your property as security, the lender is taking on less of a risk, and may offer you discounted rates and fees on your loan compared to unsecured business loans.
Access. Unlike other business loans, which may require your business to be a certain age and have a minimum turnover, you can generally use an equity loan to finance a new business.
Varied loan amount. Some lenders offer a wide range of loan amounts, giving options for people who want to start small or large businesses.
Mistakes to avoid
Having no business plan. If you have a new business, you will need to provide a detailed business plan in order to get approval for a business equity loan.
Using the same lender. You don't necessarily have to take out the equity loan with the same lender as your mortgage. It's worth researching a number of lenders and options to find the loan that is right for you.
Borrowing more than you can afford. Since a business equity loan risks the equity you have in a property, the consequences of failing to pay off the loan will be more severe. If you default on the loan, you will likely also lose the equity you have in your house.
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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