Residential Finance for SME Owners 

Most SME owners have the equity in their home and possibly any investment properties as the major security for their business borrowings.

The banks like to have real estate security for their business loans and minimal exposure on the actual business. If the bank doesn't have your home as mortgage security for your actual business loan, and they also have your home loan - the equity in your home can still be captured under all-monies clauses in the loan agreements, and indirectly via any personal guarantees that you've provided.  An all-monies clause basically states that a default under one facility is also a default under all facilities that you have with that lender.

Business owners never anticipate major problems - but very occasionally sh... does happen and you breach the terms and conditions of your business loan. If the problem can't be resolved, the lender has the option to issue a default notice advising that under the terms of your business loan /personal guarantee for the business loan, you have seven (7) days to repay the loan in full. To make life doubly interesting they could also "freeze" your business and possibly your personal accounts.

Either are absolutely guaranteed to get your full attention, and make for some interesting discussions with your staff, creditors and partner / spouse!!   

Unless circumstances dictate otherwise, we normally recommend that business and personal borrowings are with different lenders. If you need to inject equity into the business, it would be preferable to borrow against your home(s) in your own name(s) and lend the funds to the business.

Action List 1) You should seek legal and financial advice, 2) ensure that there's a written & executed loan agreement with the business 3) the loan account is reflected in the balance sheet as a liability of the business and 4) register a security interest on the PPSR in place. As a secured creditor you will be in a far better position if things go wrong. 

• Loan Purpose - why are you borrowing?
• Who actually owns the security property? Some advisers may recommend transferring the property to the spouse / partner who isn't involved in the business. This's a legitimate asset protection device - however, again you should seek legal and financial advice before acting. It's not quite as simple as it has been in the past. 
• Are there business needs as well as personal needs?
• Will some of the loan facility be tax deductible? Do we need to have multiple loan accounts.
•  Are there tax planning considerations? – do we need to talk to your accountant
• Asset protection - keeping your home / real estate out of the business
• What is the impact on your other borrowings e.g., business finance?
• What are your future intentions for the security property?
• Your plans for the next 3 -5 – 10 years?
• Type and condition of the property you’re offering as security 
• Location of the security
• Your financial situation, and capacity to repay the debt
• Your credit rating
• Lender's guidelines and policies can be a deciding factor
• What type of relationship you want with your lender.