One of the biggest hurdles facing new businesses in South Africa is access to capital. Without finance, it\u2019s nearly impossible for a start-up to get off the ground.<\/p>\n
Unfortunately, investors can be extremely difficult to come by, which forces most entrepreneurs to look at other avenues for capital, notes Rawson Property Group.<\/p>\n
One of the most accessible options, in many cases, is mortgaging \u2013 or re-mortgaging \u2013 a home, it said, adding that in the unpredictable world of start-up businesses, however, this can be an extremely risky proposition.<\/p>\n
“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\u2019s not a simple question to answer \u2013 there are a lot of aspects to consider.”<\/p>\n
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 \u2013 the property can be sold by the bank to cover its costs if something goes wrong \u2013 you\u2019ll almost always be offered a far lower interest rate than any other type of financing, including a business loan.”<\/p>\n
A mortgage can often be much quicker to secure. \u201cBusiness loans can be complicated to set up \u2013 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\u2019s a lot easier and faster to provide,” Rawson said.<\/p>\n
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.<\/p>\n
\u201cBusiness owners or founders usually structure things so that their business pays monthly loan instalments to cover the cost of the mortgage,” Rawson said. \u201cIf the business doesn\u2019t do as well as expected, however, any shortfall will become the homeowner\u2019s responsibility.<\/p>\n
“If they can\u2019t afford the payments either \u2013 which is highly likely if their income is derived from the struggling business \u2013 they could well face losing not only their new venture, but also their home. For someone just starting out, that\u2019s incredibly difficult to bounce back from.”<\/p>\n
Another danger is the temptation to spread the loan repayments over a longer-than-necessary period of time, Rawson said. \u201cA mortgage may be the cheapest form of financing, but interest still adds up over the long term,\u201d said Rawson.<\/p>\n
“If your business doesn\u2019t pay off the loan as quickly as possible, you could end up paying more in interest than you would have done if you\u2019d chosen a more expensive, yet shorter-termed, loan. It\u2019s a far better idea to aim for your business to repay the mortgage over three or four years at the most \u2013 if you don\u2019t think you\u2019ll be able to manage that, mortgaging your home may not be the best idea.”<\/p>\n
Other tell-tale signs that you shouldn\u2019t 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.<\/p>\n
How to make money from your house<\/strong><\/a><\/p>\n Don\u2019t make this costly mistake when buying your next house<\/strong><\/a><\/p>\n The one thing you should know when buying a house in SA<\/strong><\/a><\/p>\n