Introduction to Business Finance
Business finance is all about how a business manages its money, assets, and investments to achieve its goals. For small business owners, understanding business finance is essential to making smart decisions about how to allocate resources, manage cash flow, and invest in growth. One of the most common ways businesses access funds is through business loans, which can be used for a variety of purposes such as purchasing equipment, expanding operations, or acquiring commercial property.
Business loans come in different forms, including secured loans and unsecured business loans. Secured loans require the business to provide collateral, such as commercial property or other business assets, which can help secure a lower interest rate. Unsecured business loans, on the other hand, do not require collateral but may come with higher interest rates due to the increased risk for lenders. Managing business finance effectively means understanding the different types of loans available, how to use business assets wisely, and ensuring that the business’s financial situation supports its borrowing needs. By staying on top of business finance, small business owners can better manage their cash flow, invest in the right opportunities, and keep their businesses on a path to success.
You want to buy a home and you think that access to small business loans could help. But you will run into trouble if you borrow money for one purpose and use it for another.
The business has started to prosper and you’re ready to move forward in your personal life. That means buying a home for you and your family.
You look at the various home loan options to see what’s available. And that’s when a question crosses your mind…
Can a business loan be used to buy a house?
With the business doing well, you wouldn’t have many problems securing the business loan. The question is whether or not business owners can use such loans to buy properties.
Let’s look at Alex and Tina’s story. The problem was that they didn’t have the spare capital to buy the property outright. They simply did not have enough money available for the purchase, which is a common challenge for business owners. When they applied for a business loan, they became the borrower, meaning they were responsible for the loan and its repayment.
If your business isn’t doing too great, the loan will carry a higher interest rate. But if you’re in a healthy position, you may be able to borrow more and attract a lower rate. Your borrowing power is determined by factors such as your business’s financial health and the value of the property.
But you can use a business loan to buy a commercial property. Business loans can also be used to purchase investment property, provided it is for business purposes.
The Answer…
Is that it all depends on the type of property.
Simply put, you can’t use a business loan to buy a residential home. A loan for business is exactly that. Part of the lending criteria that you agree to involves using that loan for business purposes.
Moreover, your lender will ask about those purposes before they approve the loan. If you say that you want to buy a house, they’ll tell you to get a mortgage. Banks will only accept business loans when they’re used for business purposes. During the application process for a business loan, you will typically need to provide relevant documents, such as financial statements and a business plan, to support your application.
However…this does not mean that it’s impossible to buy property with a business loan.
The key is that it has to be a commercial property that your business will use.
That’s exactly what Alex and Tina wanted when they decided to buy their business premises:
For several years, Alex and Tina rented warehouse space from a landlord. They’d been in the same location for more than a decade and knew it inside and out.
When the opportunity came to buy it, they jumped. The problem was that they didn’t have the spare capital to buy the property outright.
So, they turned to a group of business mortgage brokers to help. They lodged the loan application and managed to secure a loan with a loan-to-value ratio (LVR) of 80%.
Now, they own the commercial property for use in their business.
Unfortunately, you’re going to end up disappointed if you’re thinking about buying a home to live in with a business loan.
But you can use a business loan to buy a commercial property. Now, you just need to know exactly how to do it. These are the four tips for applying for a business loan if you want to buy a business property.
Tip #1 – Prepare for a Higher Interest Rate and Lower LVR
Alex and Tina got lucky in finding a lender who would allow them to borrow with an 80% LVR. For those who don’t know, the LVR is a percentage figure that shows the ratio of the loan amount to the property’s valuation.
Typically, you’re going to find that you’ll need a 70% LVR when buying a property with a business loan. That means you need to raise at least 30% of the property’s value for use as a deposit. Plus, you have to consider additional fees that might come with the loan and as part of the buying process.
It’s also likely that you’ll face a higher interest rate with a commercial loan compared to a mortgage. However, this is also dependent on several factors, such as the health of your business. Some lenders may offer a fixed rate loan, which can provide predictable repayments, and there are various repayment options available to suit different business needs.
If your business isn’t doing too great, the loan will carry a higher interest rate. But if you’re in a healthy position, you may be able to borrow more and attract a lower rate.
Tip #2 – Get Your Documents in Order
Remember that this is a business purchase, which means your lender will want to see documentation. They’ll also want to see what benefit buying the property has for the business.
This means you need to pull together all of your financial records, such as your books and tax returns. The bank will check these documents to see that the business can service the loan. Lenders want to ensure that you can pay back the loan and that interest and fees will be paid according to the agreed terms. Providing thorough documentation can help you secure business loans with better rates and terms.
You may also need to build a business case for borrowing the money. For example, you will have to show profit projections if you intend to rent the property out to another business.
Tip #3 – Prepare for a Shorter-Loan Term
Typically, residential property loans allow you to extend the term up to 30 years.
That’s not often the case with a commercial loan. Your lender will usually want to limit the term to a maximum of 20 years. Some may even limit you to 15.
This means that you’ll repay more of the loan each month. As such, it’s crucial that you’re prepared for the extra outlay. Lenders may also consider the potential income or rental income that the commercial property can generate when assessing your ability to meet the repayment schedule.
Tip #4 – Consider Working With Specialists
Your first instinct is likely to go to one of the major banks to get your loan.
The banks offer security and a solid reputation. However, you’ll often find that they’re far less flexible with their lending criteria. Often, they’ll also want you to commit other business assets as security on the loan.
The good news is that you do have some options.
There are many specialist lenders out there that can offer more tailored loans. Private lenders are often more flexible than traditional banks and may offer unsecured loans, which do not require collateral. In some cases, these lenders can even offer unsecured finance. The most common type of guarantee required by these lenders is a first party guarantee, where the borrower provides security from an asset they own. This means that you don’t have to put your assets at risk to buy another business property.
Cash Flow and Business Loans
Cash flow is the movement of money in and out of a business, and it’s a key indicator of financial health. For many businesses, especially small businesses, maintaining a steady cash flow can be challenging—particularly when dealing with start-up costs or seasonal fluctuations in revenue. This is where business loans can play a crucial role. By providing a lump sum of money, a business loan can help cover expenses, bridge gaps in cash flow, or fund new projects.
When considering a business loan, it’s important to look at the lending criteria, such as your business credit score, financial position, and the loan amount you need. These factors will influence the interest rate you’re offered and the repayment terms of the loan. Choosing the right loan term and repayment schedule is essential to ensure that repayments fit comfortably within your business’s cash flow. By using business loans strategically, businesses can manage their finances more effectively, avoid cash shortages, and support ongoing growth. Always review your financial situation and consider how a business loan may affect getting a mortgage, ensuring that any loan you take on aligns with your business’s ability to repay, helping you maintain a healthy financial position over the long term.
Home Loan Options vs. Business Loans
When it comes to financing property, it’s important to understand the difference between home loan options and business loans. Home loans are specifically designed for individuals looking to purchase residential property, such as a house to live in. These loans typically have their own set of lending criteria, interest rates, and repayment terms, often with lower interest rates and longer loan terms compared to business loans.
Business loans, on the other hand, are intended for business purposes, such as buying commercial property, funding business operations, or investing in equipment. A commercial property loan, for example, may require a higher loan-to-value ratio (LVR) than a standard home loan, and the interest rate may be higher due to the increased risk associated with business lending. Business loans also tend to offer more flexible repayment options, including variable interest rates or fixed rate loans, to suit the unique needs of business owners.
It’s essential for business owners to carefully consider their financial situation and the purpose of the loan before applying. Using a business loan to purchase residential property is not permitted, as lenders require that business loans be used strictly for business purposes. By understanding the differences between home loan options and business loans, business owners can choose the right financing solution for their needs and ensure they meet all lending criteria.
Using Business Loans to Buy Property
So, can a business loan be used to buy a home?
Unfortunately, the answer’s no if you want to buy a residential property. However, you may be able to use a business loan to buy a property for commercial use.
You just need to find the right lender.
Even if your business has bad credit or outstanding invoices, there are lenders who may be willing to lend for commercial property purchases.
Unsecured Finance Australia offers a range of business loans that may suit your purposes. Get in touch with us today to find out if we can help you to buy a property.
