The Role of Property Ownership in Business Loan Approvals: Impacts on Value, Interest Rates, and Personal Borrowing Capacity
For small and medium-sized enterprise (SME) owners, securing a business loan can be a critical step in scaling operations, purchasing inventory, or funding new projects. However, one frequently debated question is whether owning property significantly influences a business owner’s ability to secure loans on favorable terms. This article examines how property ownership impacts loan approvals, value, and interest rates. It also explores how business debt can affect the directors’ ability to borrow personally for property purchases.
1. Does Property Ownership Impact Business Loan Terms?
Yes, property ownership can play a crucial role in determining the value of a business loan and the applicable interest rates. Here’s why:
Collateral and Risk Assessment
Property ownership is often seen as a marker of financial stability and a tangible asset that lenders can use as collateral. Even in unsecured lending scenarios, the mere fact that a business owner or director owns property can reduce perceived risk from the lender’s perspective. This can translate into:
- Higher Loan Values: Property owners are often eligible for larger loan amounts because the lender sees them as less risky.
- Lower Interest Rates: Lenders are more likely to offer competitive interest rates to borrowers who own property, as these individuals are perceived to have a stronger financial footing.
Secured vs. Unsecured Loans
While many SME lenders like Lumi, Prospa, Shift, and Dynamoney specialize in unsecured loans, the policies surrounding risk assessment often favor property-owning borrowers. Unsecured loans inherently carry higher risk, and property ownership helps mitigate some of that risk in the eyes of the lender.
2. SME Lenders and Credit Policies for Property Owners
The credit policies of SME lenders often play a significant role in determining the loan terms offered to property owners versus non-property owners. Here’s a closer look at how some prominent Australian SME lenders assess borrowers:
Lumi
- Loan Types: Lumi offers unsecured business loans up to $500,000.
- Policy Highlights: Lumi emphasizes cash flow and business performance over asset ownership. However, property ownership may still subtly influence credit decisions, leading to better terms.
- Impact on Loan Terms: While collateral isn’t required, property owners with strong credit histories may be able to negotiate better rates.
Prospa
- Loan Types: Prospa provides loans up to $500,000 with flexible terms.
- Policy Highlights: Prospa’s primary focus is on a business’s revenue and trading history. However, property ownership may provide an edge, especially for loans nearing the higher end of their value range.
- Impact on Loan Terms: Property-owning directors might qualify for longer repayment terms and marginally lower interest rates.
Shift
- Loan Types: Shift specializes in finance for inventory, equipment, and working capital.
- Policy Highlights: While Shift evaluates borrowers based on their business’s cash flow and trading history, property ownership can improve a borrower’s perceived reliability.
- Impact on Loan Terms: Borrowers who own property may access higher limits on their working capital loans.
Dynamoney
- Loan Types: Dynamoney offers quick-access loans up to $250,000.
- Policy Highlights: Like other lenders, Dynamoney focuses on business health and revenue. However, property ownership can act as a secondary indicator of financial stability.
- Impact on Loan Terms: Dynamoney may be more willing to approve loans closer to the upper limit for property owners.
3. Examples: Property Owners vs. Non-Property Owners
To illustrate how property ownership influences business loans, consider the following examples:
Scenario 1: Property Owner
- Loan Request: $200,000 for business expansion.
- Business Financials: Positive cash flow, $500,000 annual revenue.
- Credit History: Good.
- Loan Outcome:
- Lender: Prospa.
○ Approved Loan: $200,000.
○ Interest Rate: 9%.
○ Repayment Term: 36 months.
○ Reason: Property ownership lowered perceived risk, resulting in favorable terms.
Scenario 2: Non-Property Owner
- Loan Request: $200,000 for business expansion.
- Business Financials: Positive cash flow, $500,000 annual revenue.
- Credit History: Good.
- Loan Outcome:
○ Lender: Prospa.
○ Approved Loan: $150,000.
○ Interest Rate: 12%.
○ Repayment Term: 24 months.
○ Reason: Without property ownership, the lender perceived higher risk, resulting in reduced loan value and higher interest.
4. How Business Debt Affects Directors’ Personal Borrowing Capacity
While property ownership can enhance business loan terms, the reverse relationship—business debt affecting personal borrowing—can be equally impactful. Here’s how business debt influences a director’s ability to secure a personal mortgage:
Debt-to-Income Ratio
Banks and lenders assess personal loan applications using a debt-to-income (DTI) ratio, which includes both personal and business debts. High levels of business debt can reduce the director’s borrowing capacity, even if the business is profitable.
Cross-Guarantees and Liability
In some cases, directors may personally guarantee a business loan. This personal guarantee can be viewed as a liability on their credit file, potentially reducing their eligibility for a personal property loan.
Cash Flow Constraints
Servicing a business loan often places a strain on cash flow, leaving less disposable income for personal property investments. Lenders may see this as a red flag when evaluating personal loan applications.
Example: Director’s Borrowing Capacity
- Scenario: A director with $200,000 in business debt and a $100,000 personal income applies for a home loan.
- Outcome:
○ The lender factors in the business debt, reducing the borrowing capacity for the home loan.
○ If the business loan is secured against the director’s property, it further complicates the application.
5. Key Takeaways for Business Owners
Advantages of Property Ownership
- Enhanced credibility with lenders.
- Higher loan values and lower interest rates.
- Improved negotiation power for both secured and unsecured loans.
Challenges for Non-Property Owners
- Increased difficulty accessing larger loan amounts.
- Higher interest rates due to perceived risk.
- Limited options from some lenders.
Impact of Business Debt
- Business debt can directly impact a director’s ability to secure personal property loans.
- Directors should carefully manage the balance between business and personal liabilities.
Conclusion
Owning property can be a significant advantage for business owners seeking loans. It not only enhances the likelihood of approval but also improves loan terms, such as higher values and lower interest rates. However, directors must be mindful of how business debt affects their personal borrowing capacity, particularly when aiming to invest in property.
Lenders like Lumi, Prospa, Shift, and Dynamoney have varying policies, but property ownership often provides an edge in securing favorable terms. By understanding the interplay between business and personal finances, SME owners can strategically position themselves to achieve their goals while maintaining financial stability.
