As a business owner, you’re likely always searching for ways to leverage your liquid assets to expand your business. If you have a piece of property, you may be able to use its equity as security for a loan. You don’t have to own the property outright, and you could qualify for much lower rates than you would with an unsecured loan. Just be aware that this means added risk — should you default, you may lose your property.
How do business equity loans work?
Business equity loans work similarly to home equity loans — you leverage the amount of equity you have in a piece of property you own to act as security for a loan. Because of this security, you can generally expect lower interest rates and better terms, especially if the property has a good deal of equity.
Lenders will require you to submit a business proposal when you apply for a loan and to have your property evaluated. This allows lenders to determine if lending to your business is a good investment, and if so, the terms your business qualifies for. You should be able to find loans with variable and fixed rates and interest-only repayment periods. However, terms can be quite diverse, so you’ll want to take your time looking for a lender that matches your business’s needs.
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How can a business equity loan benefit my business?
- Discounted rates. Because you’re using your property as security, the lender faces less of a risk in the event that you default on your loan. This often results in lower rates and better terms for you.
- Available to all business sizes. As long as you have equity you can use, some lenders may be willing to overlook new businesses or those with a less-than-perfect track record.
- Variable 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 might otherwise qualify for.
What are the drawbacks of a business equity loan?
- Greater risk. Using your residential or commercial property as security comes with inherent risks, especially with a business loan. If you default on the loan, your property may be taken by the lender to recoup its losses.
- Requires property. While you don’t have to own the property outright, you still need to have a property to use as an investment. If your business doesn’t have a physical location or is renting a unit, you won’t qualify for a loan.
How to determine your property’s equity
Because business equity loans are similar to home equity loans, you can use the same type of equity calculation for each. For example, if your business owns a $350,000 property and has $100,000 left on the mortgage loan, your business has $200,000 of equity.
This doesn’t mean you’ll be able to borrow $200,000. Most lenders will only allow you to borrow 80% of the total equity in your property. Depending on the equity your business has and the amount you have left on your loan, it may be worthwhile to compare other secured business loans to see if there’s another way to borrow the amount you need.
How do I compare business equity loans?
- Property type. Some lenders may only let you use either a residential or commercial property as security, although some may let you use either.
- Loan-to-value of equity. Lenders will allow you to borrow up to a certain amount of the value of equity in your property, usually up to 80%, though it may depend on if it is a commercial or residential property.
- Interest rate. Business equity loans may have higher interest rates than home loans due to the higher risk the lender takes on with business loans, but it will generally be lower than an unsecured business loan of equal value.
- Loan amount and terms. The loan amount and terms you are approved for will depend on the business proposal you put forward, the financial position you’re in and the amount of security you’re able to offer.
- Additional features. Some lenders may offer additional features with business equity loans, such as a split loan option, interest-only repayments and other features that you may want to take advantage of.
Bottom line
A business equity loan can provide funding for a business that already has a property. Many lenders offer lower rates because of the lower risk, but remember: less risk for the lender results in more risk for you. Your property will be on the line, whether you choose to use a commercial or residential property. Compare your other business loan options to find more secured and unsecured loans that can be used to fund your next business project.
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