Growing your business means investing in your dream, but funding that growth means thinking very practically about where the money will come from. Perhaps the most common pathway is to go to the bank and pledge real estate as security for a loan or overdraft. But this real estate is most likely to be your home, which is the foundation of your family’s safety and stability. Aside from the personal risks, a loan against your property may not be the best way to fund your business anyway considering its unique requirements. Property secured finance may hold back the business in unexpected ways for example if the value of the property declines or fails to grow quickly enough to release the amount of funding the business requires.
So what does unsecured or non-property-secured funding have to offer small and medium sized businesses?
Peace of mind
When you think how important your home is to your family – which is the reason you’re doing all this in the first place – it’s good to remember the relative peace of mind that comes with unsecured finance. But this is only one of the ways unsecured funding can help your state of mind.
Your business operates in a volatile trading environment, and you have to cope with enough anxiety just finding suppliers, looking after customers and staying ahead of competitors. How much worse would things be if your house was tangled up in your business finances? With an unsecured funding arrangement the risks are effectively contained to your business instead of having potentially significant ‘knock on’ effects into the personal domain, and if things don’t work out, your family home is safe.
In addition, business and financing structures can get complex. Keeping the business and personal worlds separate does arguably make it easier to understand and easier to manage. Your personal and business structures can also potentially be far more agile meaning that refinancing will often be easier as personal matters will not have such a bearing on the business and vice versa. In the business world, this can help you adapt to volatile situations more easily.
Handing down or selling your business?
If the business owner is intending to hand down ownership to the next generation or sell the business, securing business finance with real estate can also make it somewhat more challenging scenario. To exit the business the outgoing owner will need to remove their property security from the business, which also removes what is often the business’ key funding line. That funding line needs to be replaced, but what if the incoming owner does not have the required level of security or is not a property owner? This is where an unsecured funding solution can make sale of business or succession scenarios much simpler as the amount of security the incoming owner has is not important. As an additional benefit, the business will also have access to additional working capital which can help the business run smoothly during the ownership transition period.
Additionally, if the business has unsecured funding in place or is funded using its own assets (as is the case with invoice finance and other receivables finance), this may indeed make it more marketable as a ‘turn-key’ opportunity when it comes to selling it. If the business has funding in place already and doesn’t require a potential owner to be a property owner then the business is accessible to a much wider range of potential buyers with different asset bases.
Could your real estate negatively impact your business?
Property owners have got used to thinking the real estate market will never reduce in value, but as history shows markets can reverse if prices in your suburb fall, the bank might downgrade their valuation of your property too. Accordingly, if you are using property-secured finance, the bank might then reduce your funding limits, or even call in part of the loan which may have dire consequences for the business and its cash flow.
Even if the value of your house doesn’t fall, it may not grow, or grow fast enough, to ensure funding limits grow to keep pace with your business. Property-secured funding then becomes an anchor your business.. You’re at the mercy of the bank’s valuations, which will fluctuate in tune with the real estate market and of course their general risk appetite. For growth-oriented businesses, this is a significant and unacceptable constraint.
The cost of saying ‘no’ to opportunities
Let’s say a significant opportunity arises, and you can’t take advantage of it because you cannot raise finance as you’ve already pledged your property as collateral for a bank loan. This is “opportunity cost” – the price of having to say “no” to an exciting venture because you can’t quickly get your hands on the funds you need. Using real estate security to access finance for day to use may not be the best use of that high-quality security. Indeed you may have other personal investments which may be more lucrative and deserving of that collateral.
Invoice Finance – reliable, scalable and reduces personal risk
Fortunately, there are now a variety of unsecured finance options that keeps business finances and personal finances separate. One of the more prevalent forms of non-property-secured finance is invoice finance, which functions as a line of credit secured against the business’ receivables (invoices). The business can draw down up to 80% against the value of what they are owed, getting a cash injection up front instead of waiting their typical cash cycle before gaining access to the funds. As an additional benefit, the limits grow in line with the value of the invoices you have outstanding, so you don’t fall short of cash as you grow.
Invoice Finance does not require real estate security, which effectively quarantines your business borrowing and protects your personal assets from risk because it is secured against business receivables. Additionally, it frees the business of the various drawbacks associated with property secured finance. Does it really make sense for a non-business-related asset to impact on the direction and growth prospects of the business?
So if the business does have a funding requirement, instead of pledging your hard-earned property to the bank it does pay to consider all options and weigh them up considering your specific circumstances. It may be that an unsecured option provides you the flexibility, simplicity and peace of mind you want to focus on business, if not life, goals.