Property-backed business loans: when the equity in a property opens a bigger door

Sometimes the number you need is bigger than your turnover can carry. A larger refit, a major stock buy, a second site, a tax debt that has grown teeth. If you own property, there is another door: the equity in your building or home can stand behind the loan. That is a powerful tool, and it deserves to be handled with respect.

What is a property-backed business loan?

It is a loan for business purposes, secured by a mortgage or a caveat over property. Business.gov.au describes a secured loan as one backed by collateral, such as property, where the lender can take the security to cover its losses if you do not repay. In exchange for that comfort, the lender can usually lend more, and may look more closely at the property than at your trading history.

Amounts here run from $20,000 to $5,000,000, against residential or commercial property. The structure depends on your situation:

• a first mortgage when there is no existing mortgage, or the new loan takes first position;
• a second mortgage when you already have a first mortgage and want to borrow more against the remaining equity;
• a caveat loan when time is short and a lender protects its interest by lodging a caveat on the title.

What does equity mean here?

Equity is the difference between what the property is worth and what is owed on it. If the property is worth more than the existing mortgage, the gap is your equity, and that gap is what a second lender is looking at.

An illustration, using no real property. A commercial unit is worth around $1,200,000 and has $500,000 owing on its mortgage, so the equity is about $700,000. A lender will not lend the whole of that, because it needs a margin for safety, but the equity is the starting point for the conversation. The What can I borrow against? quiz gives a rough equity figure from your own numbers.

When does property-backed funding make sense?

It tends to fit when:

1. The amount is larger than turnover-based funding can reach.
2. The need is clear and the repayment plan realistic.
3. Trading history is short, or credit history imperfect, and property gives the lender comfort.
4. Speed matters and the structure suits it. Larger property-secured amounts can sometimes move within 24 to 48 hours, though never as a promise.
5. The alternative is worse: a business starved of cash, a tax debt growing, a supplier relationship breaking.

It tends not to fit when a smaller unsecured facility would cover the gap, since you would be risking property for no good reason. For smaller needs, see unsecured business loans.

What do lenders weigh?

• The property: type, location, condition and title.
• What is owed: existing mortgages and charges.
• The business: trading, purpose and ability to repay.
• The borrower: credit history, considered case by case, along with any ATO debt.
• The plan: how the money is used and how the loan is repaid or refinanced.

You will usually be asked for details of the property, mortgage statements, identification and recent business bank statements. Gather them before you call.

What are the risks?

This is the part to read twice. If you cannot meet repayments, the lender can enforce its security, which means the property could be sold. Business.gov.au says exactly that about secured loans. So before pledging property:

• be sure the business can carry the repayments in a bad month, not just an average one;
• take independent legal and financial advice;
• understand the exit: how and when the loan will be repaid or refinanced;
• ask about all fees and the total cost of finance in dollars;
• make sure everyone with an interest in the property understands and agrees.

How is it different from a bank mortgage?

Mostly in purpose, speed and flexibility. A bank home loan is for buying or refinancing a home. A property-backed business loan is for business purposes only, and the assessment looks at the business as well as the property. Business.gov.au notes that non-bank lenders often have more flexible criteria than banks but can cost more, so compare the total cost against what the flexibility is worth.

What does the process look like?

You make a short enquiry. A lending specialist reads it and calls to understand the property, the debt against it, the purpose and the timing. If it looks workable, you provide the property details, mortgage statements, identification and business bank statements. The lender assesses the security and the borrower. If you decide to proceed, documents are prepared, independent advice is taken where appropriate and the loan settles.

At no point should anyone push you faster than you are comfortable going. Property is a serious commitment. A good lending specialist will tell you plainly when a lighter option would do the job, and will say so even if it means a smaller loan.

Next step

If the number is bigger than your turnover can carry and you own property, tell us about it. Share the property type and location, what is owed on it, the amount you want and what it is for. A lending specialist reads it and rings you. There is no credit check just to ask, and your details are not sprayed around a list of lenders.

Accurate details on the form (the real property, the real mortgage, the real purpose) get you to the right structure first time. See if you qualify.