Are you kicking off 2019 with a new venture? Do you have the most unique idea for a winning business? Maybe you have found a perfect space with great traffic flow, good visibility and strong foot traffic. Even better, you found a great wholesaler who is going to give you an incredible deal on your products; this idea is going to hit the jackpot!
Or maybe you already own an amazing business and there's an opportunity to expand. The business is on the cusp of greatness, and to get to the next level, you need to staff up or equipment up.
Perhaps it's not all sunshine and rainbows; your business is struggling a bit, but you know that with an injection of cash, you can get over the hurdle and turn it into a really profitable venture!
How will you find the money that you need to realize your dream? “Time to get a loan from the bank!”, you think. Good luck with that - without a solid asset in your back pocket to offer them as collateral, you can kiss that loan goodbye. Let us break it down for you:
Bank loans and collateral
Even though you may have been in business for a long time or have a solid money-making idea, completed your due diligence and know is ripe for success, unless you have a lot of collateral, and a seemingly perfect credit score, the illusion that banks are open willing to fund small business loans is often just that, an illusion. Small business in Canada face ever tightening access to funds - need proof? Here's a survey from the Canadian Business Outlook that indicates essentially that. The main inhibitor to successful funding of small business loans was the length of time in business, credit history and loan collateral.
According to a 2015 survey from the Government of Canada, loan approval rates were positively related to business size, increasing from 83 percent for a business with 1–4 employees to 89 percent for the businesses with 5–19 employees, and 97 percent for the businesses with 20–99 employees.
The lack of credit history, managerial experience and assets to put up as collateral are the main reasons why smaller businesses often experience greater difficulties accessing financing.
If you are a homeowner you probably have a good chunk of equity locked up in your home. If you are willing to strike it out on your own, why not fund your business with your home equity and become the master of all aspects of your business.
There are some big advantages for your business if you decide to borrow against your home:
- You can borrow a lot more if you choose a secured loan vs. an unsecured loan. It isn't unusual for lenders to offer a more substantial loan when it is secured against your property. Lenders like collateral and your property is solid collateral.
- If you opt for a secured loan, the term required to pay back your loan can be much longer than the normal three to five years. Lenders will often offer terms stretching as long as 10, 15 or even 20 years.
- Take out a Home Equity Line of Credit (HELOC) which can provide you access to funds immediately or on an as-needed basis. This way, you can use the funds you need when you need them. You only pay interest and principle on the outstanding balance at potentially a much lower interest rate than traditional loans.
Note: Not all lenders allow you to use your equity to fund a business, so you might be able to use this opportunity to change your mortgage provider to take advantage of better mortgage options at the same time.
The risks of borrowing against your home?
Obviously, the biggest risk is putting up your property as the main guarantor of repaying a loan, which can put your home at risk if you don’t pay. If you fail to maintain payments on the agreed repayment plan, the lender could repossess your property or force the sale of your home.
You should also consider the following when borrowing against the equity in your home:
Affordable repayment: Can you afford to make your repayments? Will your increased mortgage amount be covered in the additional income your business can generate? Is that additional income sustainable?
Business expenses: Make a detailed list of your business income and expenses so you can see if you can afford to take out additional financing on your home. Cut out as many expenses as you can.
Income protection: Borrowing against your home carries an inherent risk of one day finding yourself in a position where your business isn’t going well and you could lose your home. Hopefully you will have plenty of options if that ever happens. But right now it might be best to ensure your income is protected so that your bills and your mortgage are covered if your income were to drop significantly due to a downturn in your business.
Got it? Awesome, it's time to become the master of your domain!
Using home equity to fund your business can be a powerful tool in increasing and growing your business. But make sure it is both affordable and the right option to take. We are here to help with strategies to get your business booming with financing from your home equity! Call us today at 1.800.288.2764 to speak with one of mortgage experts!