Using your home mortgage to finance your business

One of the biggest hurdles facing new businesses in South Africa is access to capital. Without finance, it’s nearly impossible for a start-up to get off the ground.

Unfortunately, investors can be extremely difficult to come by, which forces most entrepreneurs to look at other avenues for capital, notes Rawson Property Group.

One of the most accessible options, in many cases, is mortgaging – or re-mortgaging – a home, it said, adding that in the unpredictable world of start-up businesses, however, this can be an extremely risky proposition.

“Should I mortgage my home to finance my business is a question I hear a lot from upwardly-mobile young business people,” said Bill Rawson, chairman of the Rawson Property Group, “but it’s not a simple question to answer – there are a lot of aspects to consider.”

On the positive side, Rawson explained that a mortgage is typically the least expensive form of financing available. “Because a mortgage is a secured loan – the property can be sold by the bank to cover its costs if something goes wrong – you’ll almost always be offered a far lower interest rate than any other type of financing, including a business loan.”

A mortgage can often be much quicker to secure. “Business loans can be complicated to set up – you need to have comprehensive business plans and forecasts, and be able to convince your bank that your venture is highly likely to succeed. Mortgages, on the other hand, simply require proof that you can afford the monthly instalments. That’s a lot easier and faster to provide,” Rawson said.

There are however, many negative aspects to consider before mortgaging your home to pay for your business. Most of these revolve around what would happen if things go wrong and your business fails, the property group said.

“Business owners or founders usually structure things so that their business pays monthly loan instalments to cover the cost of the mortgage,” Rawson said. “If the business doesn’t do as well as expected, however, any shortfall will become the homeowner’s responsibility.

“If they can’t afford the payments either – which is highly likely if their income is derived from the struggling business – they could well face losing not only their new venture, but also their home. For someone just starting out, that’s incredibly difficult to bounce back from.”

Another danger is the temptation to spread the loan repayments over a longer-than-necessary period of time, Rawson said. “A mortgage may be the cheapest form of financing, but interest still adds up over the long term,” said Rawson.

“If your business doesn’t pay off the loan as quickly as possible, you could end up paying more in interest than you would have done if you’d chosen a more expensive, yet shorter-termed, loan. It’s a far better idea to aim for your business to repay the mortgage over three or four years at the most – if you don’t think you’ll be able to manage that, mortgaging your home may not be the best idea.”

Other tell-tale signs that you shouldn’t be putting your home up as collateral for your business include an inability to afford potentially increasing interest rates, and a lack of sufficient cash or liquidatable assets within the business to repay the loan and protect your home in an emergency.

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