With over two million actively trading businesses in 2015, the Australian entrepreneurial spirit is flourishing. The vast majority have no more than four employees, with annual turnovers below $200,000. Unfortunately, it seems like a considerable number of these small business owners are struggling to raise capital.
A recent article from the Sydney Morning Herald revealed that more than one in ten people either re-mortgage their home, or borrow from friends and family to support their venture. Some have experienced great success, while others struggle to stay afloat, and this is a worrying trend. Going into business always comes with risks, but taking out a new mortgage for it is on an entirely different level. If the venture fails or underperforms, it could very well mean losing one’s home.
What is Driving Australians to Re-Mortgage?
These people venturing into business are well aware of the risks involved, but most of them see no other way to pursue their passion. You need money to hire employees, purchase equipment, and keep the lights on. Even if bootstrapping is an option, this isn’t always realistic, and having access to credit makes a world of difference.
Qualifying for a business loan from a bank is difficult, however, when all you have is a bare bones company in its first year or even less. Bad credit can further ruin your chances of getting a decent loan. If you have had bankruptcy in the past, or once struggled with credit card debt, traditional lenders will likely be more careful in approving your request for finances.
Thus, a re-mortgage is the easiest way for some entrepreneurs to secure a large amount of funding. It might not even look like a bad deal when interest rates are low, or if the home’s value had risen drastically compared to when you bought it. Since your debt is spread out over the loan’s lifetime, the new monthly payments probably won’t be too high for you to handle.
But is this really the best course of action?
Why this is a Flawed Way to Raise Capital
While it’s admirable how tenacious Australian business owners are, there’s no denying that they are still taking an enormous risk. Re-mortgaging means putting everything on the line, and it’s hardly the most efficient source of funding either.
Taking out a new mortgage has several disadvantages compared to other forms of financing. First is that you must have a sizable amount of home equity at the ready; most companies will only lend you up to 80% of what you own. Even then, you have to prove that you have the income to support the new, more expensive monthly payments. This will likely limit what you have to work with.
It is also quite inflexible. Say you need to secure $200,000 in funding, but only need part of that right now. When you re-mortgage, it doesn’t matter when you use the money you borrowed, you’re going to pay interest on the entire amount from day one.
When it comes to cost-effectiveness, re-mortgaging is also not the most ideal choice. The monthly payments might seem manageable at first, but you’re paying off that debt over a period of decades – this means an enormous amount of interest over the long term. Add to that the fees charged just to take out the mortgage, and this can be a very expensive source of funding.
Lastly, betting your house simply puts you in too much of an unfavourable situation. If the business does great, then it’s no problem, but the hard truth is that new businesses are more likely to fail than succeed; over 60% never make it past the first three years. Risking your home, which you’ve worked so hard for, is rarely ever worth it.
An Alternative to Betting Your House
So if you can’t borrow from the banks, what’s the answer? Business owners should seriously consider alternative financing. Alternative lending platforms offer a more transparent, convenient, and affordable finance solution.
Our business loans are designed to help SMEs. Unlike banks, you won’t have to jump through hoops or follow impossible guidelines to qualify. Requests are often approved within minutes, and the simple online application process makes everything easy. There are no hidden costs, and we offer flexible repayment options to suit your unique requirements.
This is a fast growing industry, with more start-ups turning to alternative lending platforms for financing every year. If your business has been running for at least six months and now requires additional funding, Capify can help. We provide anything from $5,000 to $400,000 in unsecured finance, for loan terms of up to 15 months.
It’s time for your business to grow, and you don’t have to bet your house to make it happen. An easier, better form of funding is right at your fingertips. If you have any inquiries, please contact us today.
Or call 1300 760 930 to speak with one of our friendly Lending Consultants now.