Home Equity Finance and Business Loans
Growth Business contributor and business finance expert Conrad Ford was recently asked by a reader whether home ownership was required to get a business loan. It is a question many of our readers have asked as well. We will not answer that particular question here (perhaps we'll do it in a later post) but Ford's response is very helpful in understanding something else our readers are interested in: home equity finance and business loans.
Ford's question was facilitated by an individual being asked about home ownership during the loan application process. He wanted to know why the question was asked, and why it was pertinent to getting a business loan. Ford explained that there are two possible reasons.
Reason #1: Using Home Equity as Security
One reason a lender might ask about home ownership is that equity can be used as security for a personal loan. In other words, business owners can get personal loans to fund a start-up or expand an existing business. Those who own property essentially have a very valuable form of security tied up in their equity. That equity can be released for the purposes of borrowing
Let's say you're interested in starting a new IT consulting business. Getting a standard business loan may be difficult inasmuch as your company has not yet been established. But if you own a home, you should still be able to borrow what you need through a home equity finance product. You offer the equity in your home as security for a personal loan that will provide the cash you need for your start-up
Reason #2: Getting to Know the People Behind the Business
Ford explained that the second reason a lender might ask about home ownership is to get to know the people behind the business in question. This reason usually applies to situations where businesses are asking to borrow rather than individuals. So this isn't a personal loan scenario like that which we described in the previous example.
A business entity is completely separate from company owners and employees in a legal sense. For example, perhaps you might establish a limited company in the future. As a company director, you bring on additional key players who also act as directors. When you go to borrow, you are borrowing as a company rather than a group of individuals.
The lender may ask about home ownership not because they expect directors to put up equity in their properties as security, but to get a better idea of the kinds of people they are dealing with. Home ownership says a lot about you and your directors. In asking if you own homes, the lender is trying to better understand your view toward financial responsibility.
Equity Finance as a Business Tool
It should be clear to you now why lenders ask about home ownership during the business loan application process. So let's move beyond that to talk about equity finance as a business tool. In previous posts, we have discussed how equity can be used to finance everything from a university education to the purchase of a new car. But your equity is just as powerful for supporting your business.
Think of equity as a revolving line of credit. As long as you have equity and a relatively decent credit rating, you can borrow against your property for just about anything. That's why so many people use home equity finance to obtain personal loans for business purposes. When you do so, you are using your home as a bank to support your company. That's a wise use of valuable equity.
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