If you are considering applying for a small business loan to grow your business then people are probably telling you you need to be a homeowner? In this article we debunk that myth! We will look at why some lenders do require or prefer you to be a homeowner and why Fair Business Loans is different.
There are two main reasons why some lenders require - or at least prefer - you to be a homeowner. The first is as security for the small business loan. The second is as confirmation of your creditworthiness. Let’s look briefly at both of these.
Secured loans
If you own a property and have a reserve of personal equity tied up in the home, this can be used as security against the loan. From a lender’s point of view it means that should anything go wrong with your business then equity from the home could be used to repay the loan. Securing a loan on your property could sometimes make the difference between yes and no to the outcome of your lending decision.
However, if you are entering into a small business loan secured on your property you need to be very aware that if things went very wrong, the lender does ultimately have the right to repossess your home to get their money back.
Unsurprisingly many small business owners are therefore not prepared to use their personal property as security for a small business loan. In this case the lender may ask them to provide a personal guarantee i.e. you agree that if your business can’t keep up with the loan repayments, you’ll repay the funds personally.
In this case the lender needs to understand your net worth to be confident that you could repay the funds. So even if your home is not used directly for security, its value would be included in their assessment of your overall financial position.
Creditworthiness
Over and above the issue of whether or not your home is used for security for the loan or as part of your net worth, the fact that you are homeowner can indicate to lenders that you are a safer risk than someone who is not. If you have a current mortgage, you will already have had an array of checks on your creditworthiness and are therefore more likely to meet lender criteria.
There will also have been due diligence checks such as proof of your identity, income, nationality, and right to live in the UK. Additionally, home ownership also means that you are likely to have a fixed address for the foreseeable future which is another criteria that is viewed as minimising risk.
So what does all this mean for you if you are not a homeowner and either do not want to provide a personal guarantee or are not in a position to do so? The good news is that with so many alternative lenders moving into the financial market, there is a growing willingness to lend to businesses and business owners that more mainstream lenders may view as risky. An increasing number of lenders are able to offer unsecured small business loans which is great news for small, growing businesses!
Fair Business Loans is one such lender! If we lend to you as an individual or sole trader then no security is required. We prefer to focus on developing trusting relationships and getting to know you and your business. Whilst we would need to be confident that your business in in a healthy condition - for example positive profit, turnover, net-worth, year on year growth and a quality customer base - our aim is to be supporters of business rather than just looking at the finances in isolation.
Why not take a look at our Case Studies page to read about some of the individuals and businesses that we have helped so far? Then if you are interested in talking to us about a small business loan from £5000 to £50,000 get in touch with us today!
