People are being rejected left, right and center when applying for loans from financial institutions now that the credit rating system has come into place and on entrepreneurs looking for funding from banks who insist on the proverbial hoops that go hand in hand with that process. The home loan product was a relatively easy way for a small business owner to get access to funding but with the rejection rates being so high is a home loan still a good way of boot strapping a business?
Lee Bromfield, the CEO of Core Lending at FNB Business, explains that this is still the case. “The main reason entrepreneurs do this is because, for most people, their biggest investment is their home and they have significant capital tied up in this. The main way for them to generate funding to start up a business is by borrowing against this asset. This is also a secured lending so it is the cheapest funding an individual can get access to.”
There are pros and cons to borrowing in this way, explains Bromfield. “Although a home loan gives access to a relatively large amount of funding, there is a fixed repayment scheme that needs to be adhered to or the consequences are that the person will lose not only their business but their home too.” The other elements to take into consideration- the loan is rather inexpensive in comparison to borrowing in an individual capacity and there are tax implications for an individual as opposed to borrowing as a business and without a track record for borrowing as a business it will prove difficult to raise funding in the future as lenders want to see that you are able to pay back the money timeously.
The risk associated with new start-ups is heavily weighted on the side of failure and although this should not deter the true opportunist from going out and giving his or her idea the best shot at working, the stress of tying up your home against whether or not your new business is going to succeed or fail, is probably not wise taking into account how much stress already exists in the beginning phases of a new enterprise although Bromfield says otherwise, “If small business owners do borrow from their home loans it is advisable that they only do that in the start-up phase and they look to rather borrow in their business capacity at a future stage,” he comments. This is and should be the major consideration when using your home loan as startup capital.