What is a Business Equity Loan?

business equity loan

A business equity loan is a business loan in which a property is used as a security. There are many people who don’t know that you can get a great interest rate when you take a business loan and use your residential property as the security.


How can I qualify for a business equity loan?

The most important factor before you qualify is that the loan must be used for business purposes because these types of loans are unregulated. The loan can be used to buy a commercial property, buy shares or investing it into the business. To do this, you must have a property that has enough equity. What happens if you don’t have equity in a property? We will cover this later in the article. Let’s first take a look at the business loan application process using banks.


Why are banks charging more when you want a business loan?

This is one of the most common questions we get. Why do banks have to charge a higher rate when the loan is meant for a business purpose? Why should this be the case when the bank has the same equity in the property used as security?

The lender has a higher risk when you purchase a business or start a new one, there is a higher risk of default when compared to buying a property then taking a standard home loan. This risk of defaulting gets reduced when the business has a proven track record.

Assessing the application will take more time: Lenders usually have quick automated methods like credit scores when assessing a home loan application. When it comes to the assessment of loan for a business, the lender will have to hire credit managers and business bankers who are experienced in this area, and this means the lender spending more on the department and salaries.

Lack of competition: you will find that many of the customers will choose one of the top four banks when they want a commercial loan. This results in lack of competition in this space, and most borrowers don’t know that there are other options that provider cheaper rates and discount packages.


How is loan assessment done by the lenders?

The process of assessing a business loan is the same as the process used in assessing a home loan. The security must be adequate, the income sufficient enough to pay the loan, and the borrower must have a good credit history. Apart from the above basic requirements, there are some other aspects of the loans that will be assessed:

Purchase of business: Although there might have financial statements that confirm the income of your business, there is no guarantee that the same results will be seen by the new owner. This is why lenders tend to become a little more conservative when it comes to the assessment of such applications.

Startup Business: A new business is able to get a loan provided they have a solid business plan, the owner has experience in that industry, and cash flow projections. These types of loans must be secured using property.

Working capital: If a borrower is interested in a loan for expanding a current profitable business, then he is in a good position because lenders like such borrowers. These loans are low risk because there is already a proven business model and income.

On top of that, there are questions that will most likely be asked by the bank when you apply for a loan. You will notice that these questions are mostly open-ended and will cover a lot of areas from why you are applying for the loan, the security, your serviceability, and your character.

  • What is it that you do? Why and how do you do it?
  • How did you get started in this industry? How long have you been there?
  • What is the reason behind starting the business? How long have you operated the business?
  • How are your accounts managed? Is there any problem you have experienced in this area?
  • Do you have risk protection and insurance? Which ones do you have?
  • Do you depend on top customers? What would happen if something was to happen to these top customers?
  • What happens if something happens to the suppliers?
  • What are some of the biggest challenges? What are some of the biggest opportunities?
  • What will happen if the payments do not come on time?
  • What do you aim to achieve in the next six months, one year, and 5 years?
  • What is it you are aiming to achieve, how, and why?
  • What this means for your business (income, cash flow, customers, market, staffing)
  • What assets do you personally and the business have? Are they saleable?
  • What are the securities you want to use to get the loan?

However, what happens if you don’t have equity in a property? How can you get a business loan then? That is where LoanOne comes into it. LoanOne is one of the fastest growing financial companies in Australia. We offer both personal loans and business loans with competitive rates across a number of different industries. Our loans are fast, flexible and can be tailored to both your personal or business needs and are done completely online. If you are stuck and don’t have equity in a property and you need a business loan fast, contact LoanOne today! Please click here to make an application now!