Every business large or small needs capital, either for day-to-day cash flow (stock, supplies, staff, rent) or for growth (new premises, equipment or other assets).
Even if your business is profitable, juggling the diametrically opposing needs of cash flow and growth can be difficult.
In order to fund business growth there are a few options available to you that are largely put into two buckets: Debt Finance or Equity Finance.
- Debt Finance is where an external lender provides money to you. This could be from a financial institution such as a bank, building society or credit union; retailers, suppliers, finance companies, or even family or friends. In this instance the money is a loan that has to be repaid.
- Equity Finance is where money is sourced internally and could include self-funding, private investors, venture capitalists, stock market, government, crowd funding or again family or friends. With this type of funding you will give up equity in your business to the person providing the money.
Accessing your home loans equity falls into the debt finance category.
If you are a business owner and have a home loan, accessing your homes equity could be used for business operations, or to even out the cash flow headaches that sometimes arise in small businesses.
According to Corelogic, over the past year Australian house prices have increased on average by 7.8% alone. When you put this on top of strong house price performance growth over the last 30 years there is a lot of available equity for business owners seeking capital to support growth.
Let’s take a look at how equity can grow over time using an average 7.25% annual growth figure while the minimum monthly principal and interest payments are made on your home loan for 9 years at an interest rate of 3.74%.
Original loan amount $480K
Property purchase price: $600K LVR* = 80%
Today’s loan amount $560K
Current property value: $1.1M LVR* = 51%
*Loan to value ratio
As you can see in this example, there is 49% equity available of $540,000 or 29% of usable equity available of $319,000. Useable equity is the figure to utilise as it maintains an 80% LVR which means you would not trigger a mortgage insurance payment.
Now that you can see how much potential equity you have available there are two key questions:
- Is using your home loans equity the right approach? You must obtain appropriate financial and legal advice for this question, as the risks to your net worth if something goes wrong could be substantial.
- How do you get access to this capital? Let’s review the steps needed.
At a macro level, to access your homes equity you will need to refinance your property.
The lender will need to revalue your home, and you will need to provide your current lender or a new one with all the details required to take out a home loan including identification and income verification and up to date business financials.
All owners of the security property need to apply for the loan. All co-owners of the property need to be aware of the risk of losing the home if the business gets into trouble and cannot make the repayments. Before applying, consider whether your business is in a sound enough position. Would you risk losing your property for your business?
It’s important that the loan is structured to enable you to access the equity. The best way to do this is via a line of credit. A line of credit will allow you to draw on the funds as you need them for your business up to an approved credit limit.
Depending on your circumstance and the lender you may be able to access as much as 90% of the properties value. Be aware however that lenders may charge a higher rate if the overall loan is deemed to be for business purposes. If this is your intention, you must declare it.
This type of lending may be tax deductible, including fees and charges. Seek appropriate financial and legal advice for your individual circumstances.
Good luck with your business!