Experts warning SMEs against borrowing against the family home
Some small- to medium-sized enterprises (SMEs) may be tempted to borrow money secured to the family home in the wake of the OCR coming down, but OneHQ is advising them to be cautious.
"The OCR may have come down and money may be cheaper than it has ever been, but a jittery banking system that is struggling to access capital and the added overlay of significantly more scrutiny due to the Australian Financial Services Royal Commission and responsible lending legislation may drive some SMEs to take risks with the family home," explains OneHQ finance navigator Dylan Ferreira.
"Business owners looking to raise cheap money to fund their business may choose to use the equity in their family home, however they should be cautioned to ensure they are raising the right type of debt for their business requirements," he says.
"This OCR cut to one per cent may tempt some to borrow further against the mortgage, which isn't always good practice," Ferreira says.
"While many business owners like to fund their business through the use of the equity in their family home, access to capital will get harder as banks look for reasons to decline. They're not interested in trying to accommodate anybody who doesn't meet their very strict criteria, and that is not good for business. Thats not stimulus," he adds.
Ferreira says its good practice for a business owner to assess all options before looking to fund the business.
"Cheaper is not always better either," he adds. "Whilst every individual circumstance is different, you should take time to understand the pros and cons associated with the funds you are looking to raise."
Some of the pros of using your family home equity to fund your business:
1. Much cheaper interest rates.
2. Banks are more comfortable with residential security.
3. Speed of decision is faster.
Some of the cons of using your family home equity to fund your business:
1. Using the equity for business purpose can restrict what you do personally.
2. Makes it hard for your accountant to separate your business and personal debts.
Ferreira goes on to say second tier lenders have a strong appetite for both personal and business debt and these lenders are now able to offer terms and conditions and rates not too dissimilar to the banks.
"It's good practice to ensure your accountant and lending broker are part of this decision process," he says.