7 Reasons Why You Shouldn't Bet Against Your Home
Many business owners will at some point consider using their home as a means of financing their business. Whilst this may initially seem like a cost effective strategy, is it really the best way to fund your business?
The big question is, should you use personal assets to fund a business? Would you put your house on the line for a bet or a listed company's shares? NO. Then why would you do it for the business? Business assets should be funded by separate business loans.
Here are 7 things to consider before you put your home on the line:
If you own your home with another person, be that your spouse, friend or family member, using home equity can bring great risk and financial stress to more than just yourself. If the business takes a downturn you are not only risking your share of the property you are jeopardising the other party’s investment. That person is now a major stake holder in your business.
Relationship issues can have a major impact on the business when the equity of a shared property is used as funding. In the case of marriage breakdown, funding and ownership of the business are put under stress and can result in the inability to split assets and move forward.
To borrow against your home effectively and fund your business, you need stable interest rates and rising home values. In other words, this strategy works best during a strong economy. What happens if the housing market drops and your house value declines? The bank may then request further cash or securities to cover the possible losses, putting you under further financial stress.
Most businesses have more than one director. There may be more than one property acting as security for the business, or worse still, only one of the director's has their house on the line leaving the other partner with much less risk associated with the business. This can cause major problems when it comes to not only risk but also fair investment in the business.
The average failure rate for a new business in Australia is 60% in the first 1-3 years. Would you ask your spouse to bet on those odds when you have both worked hard to create equity in your house? With a median house price of $900k and a median mortgage of $496k, there is significant equity in your home that you risk losing.
The value of your home equity will generally not rise inline with the business turnover. Whilst $224k in working capital might be just enough to fund a business with $2m turnover, it doesn’t meet your cash flow needs when your business grows to a $3m turnover (MV$900k MM$496k Equity @ 80% $224K).
When a business is secured with home equity it makes it harder to sell or exit a business. For example, if you want to retire and/or sell the business, the buyer needs to be able to fund the business with the same level of equity.
So why did you buy a house in the first place? To provide a safe and secure retreat for you and your family. To have something to fall back on. Don’t risk it all.
With invoice finance, the value of the invoice secures the finance, so real estate assets are not exposed.
Invoice Finance can help businesses to unlock the cash they need to progress and thrive. It’s quick and easy to access funds, which means you can get the cash flow you need to get on with business without risking your personal assets. This type of finance uses invoices as a way for businesses to unlock cash tied up in accounts receivable and therefore speeds up cash flow. This is done by selling invoices to a third party who advance an agreed percentage of funds of the invoice’s total worth, and then returns the remainder (less fees) once the invoice is paid.