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 equity loans to find the right option for you.
NAB QuickBiz Loan Offer
NAB QuickBiz Loan Offer
From
fixed rate
- Borrow up to $100,000
- Fast application and turnaround
- Sole traders, partnerships and companies can apply
100% confidential application
NAB QuickBiz Loan Offer
An unsecured business loan up to $100,000 you can apply for in minutes.
- Interest rate from: 12.95% p.a.
- Interest rate type: Fixed
- Application fee: $0
- Minimum loan amount: $5,000
- Maximum loan amount: $100,000
Business lenders you can compare
How do business equity loans work?
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. Equity loans offer similar features to home loans, 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 amount of the value of equity in your property, and this may also depend whether this is a commercial or residential property.
- Interest rate. Equity loans may have higher interest rates than home loans due to the higher risk the lender takes on with a 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 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. Generally, loan amounts vary from between $50,000 to $1,000,000 and loan terms of five to 20 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.
The good and the bad
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, 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.
The risks that you should beware of
As equity loans require you to put up your own property as security, they are a risky endeavour to take on. Because of this, you should avoid applying for one of these loans without having an air-tight business plan. You should also avoid taking on one of these loans unless you are 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.
Frequently asked questions
- Can I take out a business equity loan for an investment property? You are able to 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 are an individual investing in property.
- Are there restrictions on the type of property I can use? Different lenders may have restrictions, and you will also be required to carry out a valuation on the property.
- Can the property I use as security be owned with someone else? This will depend on the lender, but generally, yes. You will have to provide their details when you apply.
Picture: Shutterstock
