How to buy or expand your business with no deposit
Trying to qualify for business finance with your bank can be tough if you don’t have a deposit or a residential property as security to put towards the loan amount.
Luckily, a business loan with a guarantor allows you to borrow 100% of the costs without a deposit or the need for you to put up your property as security.
How much can I borrow?
By having your parents, a friend or a business partner use a property they own as security for the business loan, you won’t need to provide a deposit or any further security to get approved.
Your guarantor can borrow up to 80% of the property value of a residential property they own in equity to guarantee your business finance.
- You can borrow the full amount you need to buy an existing business or a start-up.
- Alternatively, you can use a guarantor to secure debtor finance, an invoice financing, a large overdraft facility or even equipment and motor vehicle finance.
- You won’t need a deposit or your own savings.
- You can limit your liability should you default on the business loan.
- You can get cheaper commercial interest rates, sometimes up to 5 or 6 points cheaper, by using a residential property as the security guarantee.
Call us on 1300 889 743 or complete our free assessment form to find out if you qualify for a business loan with a guarantor.
How do I qualify?
Getting approved for a business loan with a guarantor is a grey area but there are general rules that will give you a better chance of getting approved the first time around.
Who can be a guarantor?
Unlike a residential guarantor home loan, the banks don’t require you to have your parents or a close relative act as guarantor for your commercial loan, although it’s typically the case.
A business partner or a friend can also act as guarantor for the business loan but the trick to getting approved is showing that they have a legitimate interest in the business.
For example, if you’re buying a coffee shop in a company or a partnership, it’s quite common to have one of the directors or even a shareholder in the company put a residential or commercial property they own as security for the loan.
In fact, the need for the guarantor to have a vested interest in the transaction may sometimes see parents being unable to provide a guarantee.
To the bank, the deal has to make sense from a business perspective.
What can be used as security?
You can use both a residential property and a standard commercial property to secure the loan amount.
Standard commercial property includes:
- Shop fronts.
- Residential (block of units, house, unit or townhouse).
What about specialised commercial property?
Specialised commercial properties may be accepted on a case by case basis and the LVRs will be lower when it comes to the amount of equity that can be used as security.
The reason is that the value of a non-standard property can fluctuate significantly and require more frequent valuations on the part of the bank.
Basically, there is a much higher risk that the bank won’t get the full value of the property back in the event it needs to be sold.
Of course, there are also location and postcode restrictions that apply.
Do I have to be a first-time buyer?
Most lenders will only accept first home buyers wanting to get a guarantor loan but this isn’t the case with a commercial property guarantor loan.
Can I get all of the same loan features?
Yes, you can get all of the same business loan features that come with any other business loan including:
- Overdraft facility
- Line of Credit (LOC): Low risk applicants may qualify for higher limits, even up to $1 million.
- Interest only: Up to 5 years or more depending on the loan amount and the strength of the business.
- Interest rates: Variable, fixed, split and bank bill swap rates (BBSY) available.
- Additional repayments: For variable business loans only.
- Redraw facility
- 100% offset account
Will I pay a higher interest rate?
In most cases, you’ll actually get a cheaper commercial interest rate since you’re using a residential property as security.
As a general rule, the bigger the loan amount, the bigger the discount you may be eligible for.
Bear in mind though that the bigger the loan amount, the larger the guarantee required.
For example, banks usually restrict the Loan to Value Ratio (LVR) of commercial loans up to $1,000,000 to 80% of the property.
Loans up to $5,000,000 typically have LVRs capped at 70%. In this case, your guarantor would need to put up 30-35% of the property value unless you were able to put in some of your own funds.
Call us on 1300 889 743 or complete our free assessment form to speak with a specialist mortgage broker.
When does it make sense to use a guarantor?
Finance to buy an existing business or to kick-start your own start-up will always require you to have your own funds or equity in a property that you own as security for the loan amount.
Typically, if you need a loan to fund the purchase of a freehold going concern, the commercial property itself can be taken as security for the loan amount.
So, ultimately, you’ll need a security the remainder of the loan anyway and this where a business loan guarantor can help.
What are the alternatives to a guarantor business loan?
If you don’t have someone who can act as a guarantor for your business loan or you’re just not comfortable with the arrangement, there are other solutions available to you depending on the amount you need to borrow for your business.
The following solutions don’t require to have a guarantor or a residential property as security however you’d need to be a strong financial position and show that your business is in a healthy position:
- Debtor finance: Some lenders will allow you to borrow up to 90% of outstanding customer invoices if you’re a low risk borrower with strong business cash flow.
- Unsecured overdraft: At least one of our lenders offers unsecured overdrafts of up to $50,000.
- Equipment/motor vehicle finance: In this situation, you’re actually lending against the value of the equipment but you can actually get a preapproved limit of up to $100,000 just by providing an invoice of the equipment you’ve purchased.
Of course, if you need to borrow more for your business or you need money for start-up capital, your only other options are to save up a deposit or use a residential property you own, when it’s your home or an investment property, as “first party guarantee”.
What about a non-recourse business loan?
This is typically for business owners who don’t want to use a guarantor or their own property as security for a business loan.
This is typically only available for larger businesses with over $5 million in turnover and there are rules that apply to this type of lending.
Call us on 1300 889 743 or complete our free assessment form so we can take a thorough look into your situation and your needs in order find the right business loan solution for you.
Is there a limited guarantee in place?
Unlike a residential guarantor loan or even a commercial property guarantor, business loan guarantors are actually securing the entire business loan amount.
For example, when securing a residential property, the guarantor is only securing up to 20-25% of the property value and not the entire 100%.
Even when securing a commercial property, the guarantor will only need to secure roughly 30-40% of the property value.
Since the business loan is essentially unsecured and there is no existing value that the bank can “hang their hat on” so-to-speak, the guarantor has to secure the entire amount.
The only exception to this is if the guarantor is only securing part of the business loan with their property while you cover the remainder with your own funds or equity.
What are the risks to the guarantor?
The biggest risk to the guarantor is that they could potentially lose their property in the event that you default on your business loan.
Whether the reason for your default was that the business was in financial trouble or not, if the sales proceeds from the business are enough to cover the debt, your guarantor’s property will be safe.
Despite this, you and guarantor should be aware that the most common reason to default on a business loan is that the business is unsustainable. If you have a business loan guarantor, it’s likely that their property will also have to be sold to pay off the debt.
However, the bank will only use enough funds to pay off the debt while the remainder of the sales proceeds will go to your guarantor.
Do you trust the person you’re guaranteeing?
As a guarantor, you’re trusting that the borrower will be able to meet their business loan repayments, pay down the loan and eventually remove the guarantee.
You can probably place more trust in your son or daughter but be particularly careful if you’re a third party shareholder or a director providing your own security for the freehold purchase.
Ask for a business plan!
Find out what their profit and cash flow forecasts are and make sure it’s been verified by a financial professional.
Financial and legal advice is essential!
Because of the risks involved with a business loan with a guarantor, you should be seeking the advice of an independent legal professional like a solicitor.
Would you need an agreement in place between you and the guarantor?
It’s not a bank requirement but it makes sense from a legal perspective, particularly if you’re considering getting into a guarantor agreement with a third party like a friend.
Speak to a business guarantor loan expert today
Make your business dreams a reality faster and cheaper!
Call us on 1300 889 743 or complete our free assessment form and discover if you qualify for a business loan with a guarantor.