With interest rates rising and lenders tightening approval criteria for unsecured loans, business equity loans are becoming a go-to option for many businesses. By leveraging your property’s value, you can secure lower rates and access larger loan amounts, making this type of loan a practical choice for both small businesses and well-established companies. But it’s important to weigh the benefits against the risks, since you may lose your property if you can’t repay.
How do business equity loans work?
Business equity loans let you use your properties’ equity as collateral on a loan, which gives you a better shot at lower interest rates and better terms, especially for high-equity properties. Unlike secured loans, such as equipment loans or inventory loans, which are backed by specific assets, these loans rely on real estate, allowing for larger loan amounts.
To qualify, you’ll need a business proposal and property evaluation. Residential properties typically have a higher loan-to-value (LTV) ratio, up to 80%, while commercial properties start around 60% due to higher risk.
These loans are flexible and can be used for nearly any business expense, but terms vary widely across lenders, so it’s worth comparing multiple lenders.
How can a business equity loan benefit my business?
A business equity loan offers several advantages:
Discounted rates. Because you’re using your property as security, the lender faces less risk, which often results in lower rates and better terms for you.
Available to all business sizes. Even newer businesses without a strong credit history can still get a loan based on the property’s value.
Higher loan amounts. Lenders may be able to finance quite a bit of your equity, which means you’ll be able to borrow more than your business would otherwise qualify for.
When you compare secured and unsecured loans, the latter may seem simpler because it doesn’t require collateral. However, the lack of collateral means a greater risk for the lender and smaller loan limits, higher interest rates and stricter approval criteria for the borrower.
What are the drawbacks of a business equity loan?
While business equity loans offer valuable benefits, they’re not without risks:
Greater risk for the borrower. Using your residential or commercial property as collateral means putting it on the line. If you default on the loan, the lender can seize the property to recover its losses.
Requires property. You don’t need to own your property outright, but you must have equity to qualify. If your business doesn’t own property or is leasing its space, this type of loan won’t be an option.
Restrictions with existing liens or mortgages. If your property already has a mortgage or liens, this can complicate your ability to use it as collateral. Some lenders might require you to pay off or restructure these obligations before approving your loan.
How to determine your property’s equity
Calculating your property’s equity is a straightforward process that can help you understand how much you may be able to borrow with business equity financing. Because these loans work similarly to home equity loans, the calculation method is the same:
Find your property’s current market value. You can get an estimate from online tools, but for accuracy, a professional appraisal is ideal.
Subtract the amount you still owe on your mortgage or any other liens on the property.
For example, if your property is worth $350,000 and you still owe $100,000, your equity is $250,000 ($350,000 – $100,000 = $250,000).
Keep in mind that lenders typically won’t let you borrow the full equity amount. Most allow you to access 60% to 80% of your equity, which means in this example, you could borrow $200,000 max.
How do I compare business equity loans?
Finding the right business property loan means doing a bit of homework to ensure the terms match up with your needs and goals. Here’s a step-by-step guide to help you compare your options and negotiate the best deal:
Research eligibility requirements. Review each lender’s policies, including the types of properties it accepts as collateral (residential, commercial or both) and the maximum loan-to-value (LTV) ratios it offers. For example, some lenders may cap LTV at 80% for residential properties but only 60% for commercial properties.
Evaluate interest rates. Compare interest rates across lenders. While commercial equity loans generally offer lower rates than unsecured loans, these rates can vary based on factors like the property type, your business’s financial health and market conditions.
Review fees and costs. Don’t overlook application fees, property appraisal fees and ongoing charges like account maintenance. These costs can add up, so it’s important to include them in your overall loan comparison.
Look for repayment flexibility. Look for additional features, such as interest-only repayment periods, the ability to make extra repayments without penalties and a split loan option with a mix of fixed and variable rates.
Negotiate your terms. Use your business’s strengths, like a solid financial history or reliable income, as leverage to secure better rates or loan amounts. Shop around for multiple offers and don’t hesitate to ask lenders to match or improve on the best terms you’ve found. Lenders may also be open to reducing fees if you request it.
Costs of a business equity loan
Here are some of the common costs you might encounter with a business equity loan:
Interest rates. While typically lower than unsecured loans, interest rates on business equity loans vary based on factors like the loan-to-value ratio, your credit history and the type of property used as collateral.
Application fees. Many lenders charge a fee for processing your application, which can range from a few hundred to several thousand dollars, depending on the loan amount.
Property appraisal fees. A professional appraisal is usually required to determine your property’s value. These fees can range from $300 to $1,000 or more.
Legal fees. Some lenders may include charges for legal services, such as preparing loan documents or managing lien requirements.
Origination fee. This fee is calculated as a percentage of the loan amount (typically 1% to 3%) and covers the lender’s costs for underwriting and originating the loan. It’s deducted from the loan at payout, meaning you’ll receive slightly less than the approved loan amount.
Ongoing fees. Lenders may also charge maintenance fees for managing your account during the loan term.
Early repayment penalties. If you pay off your loan before the term ends, some lenders may impose a fee for lost interest revenue.
Late payment fees. Missing a repayment could result in penalties, which vary by lender.
Example of business equity loan costs:
Let’s say you’re applying for a $150,000 business equity loan with a property valued at $250,000 and $100,000 remaining on its mortgage. The lender offers an interest rate of 6% with a loan-to-value cap of 80%, allowing you to borrow up to $120,000. In this case, you might pay:
Appraisal fee: $500
Application fee: $300
Legal fees: $400
Origination fee: $2,400 (2% of the $120,000 loan amount)
Ongoing maintenance fee: $25 per month
Over a five-year term, these costs add up to several thousand dollars — and that’s not including any interest you’ll pay on the loan. That’s why it’s important to understand these costs. Knowing what to expect can help you plan your budget and find a lender with terms that work for you.
Pros and cons of business equity loans
Here’s a quick overview of the pros and cons of taking out a business equity loan.
Pros of business equity financing
Lower interest rates compared to unsecured loans
Access to higher loan amounts
Funds can be used for various purposes
Suitable for newer businesses with property equity
Longer repayment terms for manageable payments
Cons of business equity financing
Risk of losing property if you default
Equity depends on fluctuating property values
Requires owned property to qualify
Existing liens or mortgages can cause complications
Upfront costs like fees and appraisals may apply
How to apply for a business equity loan
Applying for a business equity loan doesn’t have to feel overwhelming if you take it step by step. Here’s what you need to do:
Evaluate your property’s equity. Figure out how much equity you have in your property. Subtract the balance of any mortgages or liens from its current market value. A professional appraisal can provide the most accurate estimate.
Gather essential documents. You’ll typically need a property appraisal or valuation report, statements for any mortgages or liens on the property, title documents proving ownership and financial documents such as tax returns or profit and loss statements.
Research lenders and compare options. Look for lenders who specialize in business equity loans and compare their offerings. Focus on loan-to-value ratios, interest rates, fees and repayment terms to find the best fit for your needs.
Create a business proposal. Most lenders ask for a detailed plan showing how you’ll use the loan and how it will benefit your business. Include financial projections and demonstrate to the lender that you can repay the loan on time.
Submit your application. Complete the lender’s application and submit the required documents. Be ready to answer questions about your property, business and financials as part of the lender’s evaluation process.
Wait for approval and property evaluation. The lender assesses your property’s value and reviews your application. They’ll use this information to decide if you qualify and what loan terms they can offer.
Review the loan agreement and accept terms. Once you receive approval, carefully review the loan agreement. If everything looks good, sign the agreement and finalize the loan.
Eligibility requirements
While requirements can vary, here are the most common ones you’ll need to prepare for:
Credit score. Lenders typically look for a solid credit history, often requiring a credit score of 650 or higher. Stronger scores help you secure better rates and terms.
Property documentation. You’ll need proof of ownership, such as a property title, and details on any existing mortgages or liens. Lenders may also request a recent appraisal to verify the property’s value.
Equity availability. Lenders typically allow you to borrow between 60% to 80% of your property’s value, minus any existing mortgages or liens.
Business income levels. Lenders assess your income, profitability and cash flow to ensure your business can handle loan repayments.
Time in business. Lenders may have minimum requirements, such as operating for at least one or two years, though newer businesses with strong equity may still qualify.
Alternatives to business equity loans
If a business equity loan doesn’t suit your needs, here are several other financing options to consider.
The Finder Score crunches 12+ types of business loans across 35+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
To provide a Score, we compare like-for-like loans. So if you're comparing the best business loans for startups loans, you can see how each business loan stacks up against other business loans with the same borrower type, rate type and repayment type.
A business equity loan can help you unlock funding with lower rates and higher borrowing limits by using your property’s value as collateral. While this type of loan can be a great option for businesses with enough equity, it’s important to understand the risks, like the potential loss of your property.
Take the time to review the costs, eligibility requirements and steps to apply so you’re fully prepared before approaching lenders. And if a business equity loan doesn’t seem like the right fit, there are plenty of other financing options to explore.
Frequently asked questions
What’s the difference between a commercial equity loan and a business equity loan?
A business equity loan uses any property owned by a business — commercial or residential — as collateral, while a commercial equity loan specifically uses commercial property, like office buildings or warehouses.
Is equity financing good for a small business?
Yes, equity financing can work well for small businesses that have property to leverage and need access to larger funds at lower rates. Just make sure the benefits outweigh the risks and that it fits your business’s financial plans.
What happens if I sell the property while a business equity loan is active?
If you sell the property while a business equity loan is active, the loan typically needs to be paid off in full from the sale proceeds. Since the property serves as collateral, the lender will require the balance to be settled before releasing their claim on it.
Christi Gorbett is a freelance writer with more than eight years of experience and a master's degree in English. She’s created a wide range of content for banks, financial product comparison sites, and marketing companies on topics like small business loans, credit cards, mortgages, retirement planning, lender reviews, and more.
As a former teacher, Christi excels at making complex financial topics accessible and easy to understand. Her interest in finance grew when she returned to the U.S. after living in South Korea for nearly a decade.
This shift was driven by several personal financial challenges: rebuilding her financial base after the move home, starting her own business, and catching up on retirement savings. These experiences deepened Christi’s practical understanding of finance and intensified her interest in the field. See full bio
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