Did you know you can get an excellent interest rate for your business loan if you use residential property as security?

While most banks will still refer you to business banking and charge you a higher rate, some lenders can consider giving you the discounts normally reserved for home loans.


How do I qualify?

  • The loan must be predominately for business purpose, as this type of loan is unregulated.
  • You must be buying a commercial property, buying shares or investing money into your business.
  • You must own residential property that has sufficient equity in it.

Note:This lender may require that you take out a second mortgage on your residential property. You may also have to refinance your existing loan to this lender.


How much can I borrow?

We can help you with a secured business loan using either residential property or a commercial property as security. You can borrow:

  • Up to 100% of the value of your residential properties at very competitive interest rates.
  • Up to 80% of the value of your commercial properties.

If you have a home, investment property, commercial property or other real estate that you can use as security then please enquire online or call us on 1300 889 743 to find out how we can help.


How can I borrow 100% with a business loan?

If you’re using your home as security and are putting money into an existing business then we may be able to finance up to 100% of the value of your property as a business equity loan!

For example, a business owner has a home valued at $800,000 and has a home loan for $300,000. If his business is profitable and he can prove that the loan will be used for a sound business purpose then we can release $500,000 into the business as a business loan.

This is effectively borrowing 100% of the value of your property.


Can I borrow the full cost of a commercial property?

Yes, you can as long as you have additional security for the loan. Normally, this is the investor’s home or an investment property.

For example, an investor wants to purchase a commercial property that’s worth $1.5 million with no deposit.

However, they have a residential property worth $600,000 with $200,000 left owing. This lender will allow you to use the $400,000 equity in your residential property, to put toward a deposit for the commercial property.

This increases the Loan to Value Ratio (LVR) on your residential property, bringing to to 100% of the value. You can then borrow on the commercial property to obtain the remainder of the required funds.


Why do banks charge more for business loans?

Our customers commonly ask us why the banks charge more for a loan that is used for business purposes. Considering that the bank has the same equity in the property as security, why is it that commercial or business finance has a higher interest rate?

  • Higher risk to the lender: When starting up a new business or purchasing an existing business, there’s a high risk of default compared to when purchasing a property and taking out a standard home loan. However, if the existing business has a proven track record, the risk of default is reduced.
  • The assessment of your application takes more time: Lenders can easily assess home loan applications using quick automated methods such as credit scoring. However when assessing a loan for a business, the lender needs experienced credit managers and business bankers who are often on high salaries.
  • Lack of competition: The majority of customers take out a commercial loan with one of the four major banks. Due to the lack of competition in the commercial finance market, many borrowers are simply unaware of the cheaper options and discount packages elsewhere.

How to get the lowest interest rate

There are three main factors that help you get the cheapest possible equity loan so that you can release funds for use in your small business:

  1. Apply with the right lender: The first mistake that most people make is to approach their current bank to get a business loan. The key to getting a low rate is to find a lender that will assess your commercial loan as a home loan. This can reduce the interest rate payable by as much as 1% to 2%!
  2. Use your equity in residential property: Residential property such as a house, unit or block of land is excellent security for a loan. It can be accurately valued and sold quickly in the event of a default. Commercial properties are difficult to value and take a long time to sell, therefore tend to have higher interest rates.
  3. Use 100% secured loans: If your loan isn’t completely secured then the rate will be much higher or the loan may be declined. If you’re borrowing more than 90% of a residential property or 70% of a commercial property then your loan poses a very high risk. We can only assist with secured business loans.

Our mortgage brokers are specialists regarding finance for small and medium sized businesses.

If you own a property and would like to use it as security for a business equity loan then please call us on 1300 889 743 or enquire online and one of our brokers will give you a call to discuss your needs.


How do banks assess business loans?

The assessment of a business loan is similar to that of a standard home loan.

There must be adequate security, sufficient income to repay the loan and the borrower needs to have an excellent credit history.

In addition to these basic requirements, there are some unique aspects of the loan that are also assessed:

  • Purchase of a business: Although there may be financial statements confirming the businesses’ current income, there’s no guarantee that the new owner will get the same results. Therefore, lenders are conservative when assessing this type of application.
  • Start up businesses: Banks can consider lending to a new business if there’s a solid business plan, cash flow projection and the owner has experience in the same industry. Start up business loans must always be fully secured by property.
  • Working capital: Borrowing to expand a current profitable business is the preferred type of business loan for lenders. These loans are considered to be low risk as there’s already a proven income and tested business model.
  • Cash out: Banks consider equity releases or “cash out” to be a high risk for most business loans. We can assist with these applications on a case by case basis if residential property is available as security.
  • Directors’ experience: Banks like to see owners or directors who have experience in their industry. If you don’t have experience, it’s likely that you’ll be required to provide residential security for your loan.
  • And much more: The assessment of business loans is complex and beyond the scope of this article. We recommend that you discuss your situation with one of our mortgage brokers. They are experts in business equity loans and know which lenders will consider your mortgage application.

What kind of questions will the bank ask?

The following is an example of the questions that a relationship manager will typically ask of a business loan applicant.

The questions are mostly open-ended and cover everything from the purpose of the loan, your serviceability, your security and your overall character as a business owner.

  • What do you do? How do you do it? Why do you do it?
  • How long have you been in the industry? How did you start?
  • How long have you been in business? What led you to starting your business?
  • How do you manage your accounts? Have you had any problems with this is in the past?
  • What insurances or risk protection do you have in place?
  • How dependent are you on your top customers? Do you have alternatives if something was to happen to them?
  • What would happen to your business if something happened to your suppliers?
  • What are the biggest opportunities? What are the biggest challenges?
  • hat happens if you don’t receive payments on time?
  • What would you like to achieve in the next six months? Year? 5 years?
  • What are you looking to do and why? Why now?
  • What does this mean for your business (cash flow, income, markets, customers, staffing)?
  • What assets do you hold personally and in your business? How saleable are the assets that you hold?
  • What security do you have that you could provide towards this transaction?

Apply for a business loan using your equity

Business loans can be significantly more complicated than standard residential loans.

For this reason, it’s best to speak to a mortgage broker who specialises in business equity loans.

If you have a home, investment property, commercial property or other real estate that you can use as security then please enquire online or call us on 1300 889 743.

We can quickly work out which loans you can qualify for and which lenders can give you the best possible interest rate discount.

  • Summer

    I am trying to refinance my current mortgage and use the cash for the business purpose. I wanted to enquire whether is there an LMI in the business loan?

  • Hi Summer,

    There is an LMI only if you are borrowing above 80% in normal circumstances. Also, if you are self-employed you might be charged an LMI above 60% by some lenders, but please note that there is difference in the amount you could borrow depending on the nature of the security.

  • Scoobz

    Hi, I have 250k equity in my home and looking to purchase an established gym for 500k. Can this be done, and under what conditions?

  • Hi Scoobz,
    Yes this can be done in some situations. We’d need to know more information. In particular:
    – Do you have experience operating a gym
    – Is the current business trading profitably
    – Is the loan affordable based on the gym income
    – What are the value of the gym assets e.g. equipment / weights
    It’s a case by case situation. Normally they’d want the full amount secured by property if you don’t have much experience. But in some cases the equipment value can be used as additional security.

  • Hogan

    I would like to know what bank bill rates are currently on offer and would appreciate if you can help me with this. Thanks in advance.

  • Hi Hogan,

    Banks don’t always advertise their lowest business loan interest rates so it’s difficult to know what’s competitive and what’s not. However, we’ve scoured the most competitive business loan interest rates on offer, where lenders have set pricing including rates for BBSY business loans. Here’s the link to the business loan interest rates page:
    https://www.homeloanexperts.com.au/business-loans/business-loan-interest-rates/

  • EMs

    Is there any possibility to have at least some sort of compromise in the business loan agreement? Or will I just have to accept the lender’s terms? Or go with another lender?

  • Hi there,

    You can actually negotiate the loan agreement contract with your lender – you can haggle fees, interest rates and even annual review requirements. The bank wans your business so you do have the power to negotiate and if you don’t come to a good deal, you can apply with another lender. Please feel free to check out the business loan agreement page if you want to find out more about this:
    https://www.homeloanexperts.com.au/business-loans/business-loan-agreement/

  • Arvin

    We’re a new business so will we be allowed to borrow?

  • Hey Arvin,
    If you’re a new business then banks can consider lending if there’s a solid business plan, cash flow projection and the owner has experience in the same industry. Start up business loans must always be fully secured by property.

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  • newB

    Hi,
    We are considering to release equity from our current residential property, which has a personal mortgage, but is also the registered address for our company) We want to use the funds to acquire another property in the USA (again residential ) but owned by the company and again it will be used and registered as the company’s USA office. Will there be an issue concerning releasing equity from a personal mortgage for a business purpose?

  • Hi NewB
    Many lenders either:
    – Don’t accept business purpose loans (tends to be smaller banks)
    – Accept business loans but charge a high rate
    – Do not allow business loan funds to be used overseas
    We have some lenders that provide business loans at home loan rates. I’ll email you and cc one of our specialists in this area.
    We have helped a few people use Australian real estate as security for a loan to buy a property in the USA. The returns there are fantastic! Hope it goes well for you.

  • PeterH65

    We have a current business loan and overdraft at ridiculous banks rates, even though both are secured against our residential property. We are trying to increase our home loan and apply those funds to pay out the business borrowings, but we are struggling to find a lender. Our business loans = 18% of home value, current home loan = 19% of home value. The business pays the business loans and my PAYG salary pays our mortgage. Why can’t I get a lender to give me a home loan at 37% of home value and allow me to disburse those funds at my discretion?

  • Hi Peter,
    Yes this is ridiculous. Obviously you’re a low risk customer and with your home as security it’s unreasonable for a lender to charge you a higher rate.
    I’ll email you and cc one of our business loan specialists. We have a few lenders that can do business loans at home loan rates when it is secured by your home.

  • Nathan Duggan

    I am looking to borrow $200K to invest in a franchise business that I have a lot of experience in. I have $900K equity in my home (conservative figure). Would a home equity loan be best? I currently have a $240K line of credit loan against my home which has not been used to date. I got it purely for investment purposes at a very good rate. Could I use the current line of credit loan I have to fund the $200K franchise given it is already set up?

  • Hi Nathan,
    The ideal way to fund this is to borrow against your home not against the franchise itself. That way you’ll get a longer term (lower minimum payments) and a better rate.
    If you can use your current income to prove that you can afford the loan then we have lenders that can do this at home loan rates below 4%!
    If you are relying on the income from the new franchise then we’ll need to do this as a business loan and the rates would be higher.
    Do you have an existing job / business that we can use to prove your income?
    Also it’s great that you have experience in this field. That gives us a lot of confidence to assist you further.

  • Stephen Lorkin

    I have a business worth around $100k with no debit attached to it. Can I take a loan out against my business after its had an bank evaluation?

  • Hi Stephen
    Yes you can borrow against your business however this would be considered to be an unsecured loan by the bank. So the rates may be higher than a standard business loan and they’d want you to pay off the loan over a shorter term e.g. 10 years or 5 years.

  • Stephen Lorkin

    Thank you very much

  • Deevya

    Hi,

    We have got a house valued at $575000 and home loan of $395000, we are looking to buy subway franchise.

    As per above article, correct me if I am wrong we can borrow $180000 with house as security and that will go in as our contributing amount to purchase the business.

    Business is worth $370000 so effectively we need to contribute $5000 + other miscellaneous costs towards the business as business banking division is happy to lend us 50% of the business purchae price.

    Does that sound about right,!?

  • Hi Deevya
    Yes you could borrow $180k against your home and 50% of the business value approximately. However this is borrowing at the absolute limit so you’d need to be very strong to get approved. In other words you need to have good incomes from prior jobs (shows you could return to an old job if needed) and experience of some kind in management or business.

    It’s important that you do your own risk assessment as well. Even if a bank can lend you the money you need to be careful as there’s no going back if the business doesn’t work out and you may lose your home.

  • Deevya

    Hi, Thanks for the reply.

    Yes I do understand, too much of risk but with a business earning 21%CAGR we will take calculated risks and confident of our skills I think after 2.5 years we will be floating.

    Thanks again for the response :)

  • Ok that’s great. I’d recommend that you don’t commit to buy until you have formal finance approval as with this gearing level it’s always 50/50 to get approved.

  • Deevya

    Thanks for bringing that up.

    As an old Russian adage goes ” I won’t get into my swimming costume until I see a pool filled with water” :)

    We do have around $40k of savings so gearing levels won’t be worst.

    Are there any banks you would recommend which are easy to deal with, given our situation.

    Thanks heaps.

    D

  • Hi Deevya
    I’ll email you some queries and put you in touch with a commercial broker who can assist.
    As a general rule for Subway the max loan is 2.5x the EBITDA of the franchise.
    Love the saying btw!