Owning a business is a dream for many who want to reap the rewards of independence and flexibility whilst also carving a self-designed career path in an industry of choice. However, there are many financial considerations to factor in before taking the leap, even as an experienced businessperson.
There are several financing options available depending on the business owner's requirements. For example, a new business might require start-up funding, a growing business with a proven income record of income may require finance to expand their operations, make investments into extra machinery or equipment or could be looking to refinance current arrangements.
The diverse financial market will offer a wide array of business loans and financing options depending on the requirements. However, for tailored advice, it is highly recommended that you consult a financing expert, especially if you are considering refinancing against personal assets. Their advice can be invaluable for business owners, helping find the perfect financial product as well as comparing products to ensure the most competitive interest rate and terms.
However, before approaching a loan expert or mortgage advisor, it's worth undertaking some initial research into the options available and undertaking an assessment of the business financial requirements independently.
So, what questions do you need to answer before refinancing, and what are the most common options available?
What is refinancing?
Firstly, let's briefly cover what refinancing is. Refinancing is the term used when you borrow money against existing assets often taking a higher level of finance to provide extra cash for a specific task or purchase.
Due to record low interest rates, refinancing is a popular option at present. However, if the purpose of further borrowing is to invest in a business or start up a new venture, lenders are likely to want further details in order to evaluate the risks involved.
Even when a refinancing offer is received, it is worth taking time to fully understand the risks of defaulting as the asset used to secure the additional borrowing is at risk.
Understanding current debts
One of the first steps when making a review and determining if refinancing is an option is to undertake a review of how much is owed on current mortgages or loans.
Keeping a record of the total amount owed and the monthly repayments will help the business owner understand their current commitments and will also help later should an application for refinancing be made as the information will already be at hand.
Assess the equity owned in assets
The next step is to establish the value of current assets owned by the business owner, as well as confirming the equity accumulated. The most accurate method of undertaking this would be to seek a formal property or other asset valuation. Once the current asset values are known, the loan to value ratio can be assessed in order to calculate the equity owned.
Should the asset equity be low, the business owner should seriously reconsider taking on more debt and ensure that income from the business is sufficient and stable in order to cover the additional repayments. In addition, the business owner would need to assess the risks of losing their home or other assets in the event of default on the loan.
Also with low equity, there is less collateral to offer potential lenders making the loan a higher risk for the lender. Any lenders willing to offer finance to high-risk applicants could include additional terms with their offer alongside high-interest rates which provide them with greater security.
Producing a business plan and cash flow documents
Once the financial position of the business owner is confirmed, the next step is to draft or update a business plan with associated cash flow.
The document should set out a plan for obtaining and utilising the additional finance including any start up or development plan, detailing any overhead or stock costs and projecting prospective income that will be used to make the repayments.
Such documents will often be requested by potential lenders during the application of a refinancing loan. Preparing them in advance will ensure that the applicant is organised and will save time later on.
Lending criteria
Each lender will set their own loan eligibility criteria and underwriting process for approving finance. However, most will assess the following elements when reviewing a loan application:
- The credit score of the business owner applicant.
- The creditworthiness of the business.
- Income and affordability – proof of the business' income and typical monthly expenses will be required, often including a review of the following evidence: company tax returns, business bank statements and any other proof of income sources, such as tenancy agreements for rental income.
- Security - The amount of property equity or the total value of other assets put forward as colleterial for a secured loan.
Should a business owner not be able to produce one or more of the above, or have insufficient creditworthiness, a referral to a loan expert or mortgage broker would be highly advised in order to investigate the likelihood of an application being successful before being submitted.
Loan experts or mortgage brokers are best placed to advise which lenders would be more suited to specific situations or offer suggestions of alternative financing options.
What other financing options are there?
If following assessment, it's decided that there is insufficient equity in the current assets, or the risks are too high to associate business borrowing
There are other options such as:
- Self-employed loans – A loan specifically for the self-employed, it can either be secured against an asset such as property, or unsecured, based solely on the credit history of the person and associated business. There is often a range of repayment periods available on the different self-employed financial loan products, depending on the value and purpose of the loan. Self-employed loans can be used for a range of purposes such as large investments to expand the business or short-term loans to aid cash flow.
- Specific Loans for the type of business – Buy-to-let mortgages or development finance may be suitable for some business owners who are wishing to develop or lease property.
- Bridging loans - A bridging loan is a short-term financial product that can be utilised for many different reasons such as business ventures, settling tax bills or arranging finances during a divorce. Bridging loans can be expensive longer term however they can provide the loan holder time to refinance or sell assets.
Final thoughts
In this post, we have discussed the key considerations before applying for loans that involve refinancing a business owners' house.
There are many different financial products available on the market including secured and unsecured options that can be considered.
A loan expert or mortgage advisor will be best placed to review the entire market for your specific requirements and compare various financial options in order to find the best rates and terms.
As with any financial decision, it is highly recommended that independent financial advice is sought before committing, to ensure that all terms are fully understood.
Copyright 2022. Featured post made possible by Susan Barr, Ashtons.