Funding can be pressing issue for many small businesses, especially start-ups, and deciding on the best place to find it can be tricky. An unfortunate circumstance of the current global economy problems is that banks are less keen on loaning to small business than they have been in the past meaning many small business owners have had to get creative when it comes to raising capital. One option that has appealed to an increasing number of entrepreneurs is taking out a secured loan against their property; this is also known as a homeowner loan. While these loans can be given by a number of reputable companies, they are not without risk.
The Housing Market
House prices have taken a tumble in the recession and, as such, you may not be able to borrow as much as you may think against your property. If it is the case that a loan against your home does not cover the amount you need, it may be wise to consider other options; you will need to pay this loan back eventually and if it is not enough to make your business successful then repayments will be a major struggle. That said, just like estate agents, different loan providers will have different ideas regarding your property’s worth so shop around to make sure you get the best loan offer.
The most important thing to consider when taking out a loan is your ability to pay it back. Consider how much income your business is likely to make over the period you plan to repay your loan and budget accordingly. Even if the opportunity arises do not borrow more than you need to; you will only end up spending, and therefore repaying (with interest), more than is necessary.
On the topic of interest, one of the main reasons small business owners have been taking homeowner loans is due to the relatively low rates of interest, often around 9%APR; so, just a little more than the bank. This makes them a more sensible option for business loans when compared to short-term or pay-day loan companies who can have interest rates in excess of 2,000%.
Consequences of Defaulting
While defaulting on a loan is not what anyone sets out to do, it is worth considering the worst case scenario before going in. The majority of secured loans use a home as collateral, so you have to be sure that your business will be successful enough to risk the roof over your families head. Defaulting on these types of loan can, in extreme cases, result in bankruptcy or a deficiency judgement being issued; this is where the loan provider deems the value of your house insufficient to cover the money due back and orders you to pay more as well as losing your home.
Despite the obvious risks, homeowner loans are a good way to provide an immediate injection of funds into your business and, if you are sensible enough with your ambitions, secured loans should have no major, long term, financial disadvantages. If you are unsure about taking a loan always discuss it with an expert such as an accountant first.