Are you a small business owner looking to take out a business loan?
If the answer is yes, then this article is for you.
When it comes to many business loans, your chosen lender will want you to be able to secure the loan using some form of asset.
Securing a business loan
Many small business owners will use a property – often their owner-occupied home – as security for the business loan.
Of course, it's important to note that a residential property isn't the only asset you can use to secure a business loan.
In many instances, your preferred lender will be happy to look at any type of property – residential, commercial or rural land – as security for the loan.
And in some cases, your lender may also be willing to accept other balance sheet assets you have. Assets including your cars, equipment, or even the value of your current business could potentially be used as the security for your loan.
But, let's say you want to use your residential home as security. What are the risks associated with this practice and what should you be aware of before heading down this path?
Using your home as security
If you do choose to use your home as security for your business loan and (for whatever reason) you find you can no longer repay your business loan, the bank may sell your home.
If this happens, the bank will use the money from the sale of your home to cover the remaining debt owing on your business loan as well as any additional expenses incurred along the way.
As you can see, using your home as security for your business loan is a big risk, so it's important you take the time to consciously weigh up all the pros and cons. Make sure you do your due diligence and seek out the advice of a finance broker, along with your accountant before heading down this path.
It's also important to consider whether or not you will want to sell your asset within the business loan term.
Selling my asset
While you are certainly allowed to sell the asset that you used to secure your business loan (in this case your residential home), in some instances, you may have to ask your lender for their agreement first.
And, depending on your unique situation, you may need to provide another asset to secure the business loan. Alternatively, you may be able to use the cash you received from the sale of your home to pay out the business loan.
Whatever your situation, it's critical that you talk to your mortgage broker and determine the best finance options for your business.