Funding a small business with a mortgage...what the banks want to know!
Small businesses come in all shapes and sizes but in little old New Zealand a small business is usually an extension of the quarter acre dream. Now that we’ve got all the clichés out of the way I will tell you what I mean: most small businesses are owned and operated by mum and dad which means most small businesses are funded via a mortgage over the family home.
Most small business owners also need a place to live, again a mortgage can be really helpful in this regard. Let’s take a look at what the banks are looking for when you apply for a mortgage.
The bizfit team will be happy to help you consider these and other factors to fund your business.
A loan approval is generally provided by a credit assessor that sits in a corporate office that you will never meet so it is important they understand the purpose of your loan. Are you restructuring your current lending to release equity to buy a business or expand your current business? Are you applying for a small “top-up” so you can meet your tax obligations?
Now that the assessor knows why you want the money you need to prove to them that you are going to pay them back. To do this you need to show that you pay your bills on time, live within your means (including overdraft and credit card limits), and don’t miss any of your loan payments. Ideally you will be able to show you have stable employment and living arrangements, lenders will ask for at least three years of history.
This is the easy one, a list of your assets and liabilities. This shows lenders what the current state of play is and what you have to fall back on if things go wrong. It also helps them assess what other financial commitments you have to service. Remember, you have a legal obligation to disclose all information.
When lending hundreds of thousands of dollars lenders want to know that if you default they can get their money back by selling your property. They want to get comfortable with the property (including building materials) and location as this will impact the ability to sell the property. Lenders also want to know that if the property market falls they can still recover their money. This is especially important with high LVR (Loan to Value) lending.
This is the big one, can you afford to repay your loan? Sounds simple but the devil is in the detail. Lenders assess your ability to repay a loan based on interest rates between 7% and 8%. They also ignore income that is not of a regular nature and only 75% of rental income is recognised.
If you have overseas income, good luck! Banks don’t recognise overseas self-employed income. If you are restructuring/refinancing your mortgage to buy a business, this may present servicing challenges on your family home as you generally need at least one year’s financial statements (sometimes two) to evidence self-employed or business income.
When starting a new business, buying or expanding an existing one, a mortgage can be a great (and cheap) source of funding, but it comes with risk i.e. your home. What new business owners may not realise is that their ability to obtain a mortgage for personal or investment purposes will also be limited until they have at least one year of financial statements – that said, other lending options are available.