When you apply for business funding, it’s fairly likely that you’ll be asked if you’re a homeowner. This can come across as quite unnerving, and you might wonder if this means the lender wants a charge over your home.
But the homeowner question isn’t necessarily as daunting as you might think. Do you have to be a homeowner to get a business loan? The short answer is no — but it might help.
Since it’s the most common assumption, I’ll start with the obvious reason being a homeowner may help you get a business loan. If you own a property, it represents a significant chunk of capital that can be used as security.
Of course, not all business owners will be prepared to involve their personal assets in this way, but if you’re willing to use it, personal equity might make the difference between a no and a yes. For example, there are some lenders offering personal loans for business purposes, and for these products being a homeowner makes a huge difference to the strength of your application.
However, when your business is the party borrowing money and lenders ask if you own your home, it doesn’t necessarily mean they want to take it as security — more on that in a moment.
Perhaps the least understood reason that lenders ask about your homeowner status is because of the wider implications it has about your personal credit history. As important as the business is, many lenders want to know about the men and women behind it too, so they’ll often look at both the business’s credit history and your own personal credit file.
Being a homeowner is important in this regard for two reasons. First, the process of buying a residential property usually involves a successful mortgage application, and therefore a variety of due diligence checks such as proof of your identity, income, nationality, and right to live in the UK.
Home ownership also ties you to one address for the foreseeable future — which is another small detail that helps the lender see your application as lower-risk.
For these reasons, being a homeowner is something of a fast-track for the lender to understand your personal circumstances — if you own your home, by extension that means many of the above details have already been proven to another lender.
Personal guarantees are required (or preferred) in a variety of business finance scenarios, the most common example being an unsecured business loan backed up by a personal guarantee from each of the directors involved.
When you give a personal guarantee, you’re agreeing that if your business can’t keep up with repayments, you’ll repay the funds personally. Because they don’t directly involve specific assets, personal guarantees are not considered ‘security’ as such, so much as something that offers the lender reassurance that you’re confident in your business and willing to have some skin in the game.
Being a homeowner is important for personal guarantees, because with some capital in the background you’re more likely to be able to repay the loan if the worst case scenario arises. It’s also important to emphasise that for personal guarantees, the lender asks about your homeowner status as a way of assessing personal net worth — not because your home will be involved directly.
When it comes to home ownership and business lending, the bottom line is that it’s all about risk — if you’re a homeowner, the lender will have more confidence in you, regardless of whether or not you’re offering a personal guarantee.
Fundamentally, you definitely don’t have to be a homeowner to get a business loan — but you might find it makes your application easier, brings down the interest rate, or gets you access to a larger sum of money.
Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016.