The Challenge of Non-Homeownership
Launching a new venture comes with its set of hurdles, and when you're not a homeowner, accessing traditional financing options can be challenging. Many banks are cautious about lending to non-homeowners due to the perceived higher risk.
The Homeowner Advantage🏠
Homeowners often find it easier to secure business loans because they can use their property as collateral, providing an extra layer of security for lenders. However, this advantage isn't readily available to those who have decided to rent, live with family, or just haven’t prioritised purchasing a home.
Government-Backed Loans and Non-Homeowners🏦
For new business owners, government-backed loans can be a lifeline. However, it's crucial to note that these schemes are usually personal loans for the purposes of starting a business. Therefore, the loan is secured against you personally. In our experience this makes it tricky for non-homeowners to qualify.
Exploring Alternative Options ⚖️
So, what options are available for non-homeowners? The good news is that even without homeownership, there are viable alternatives. Suppose you need to purchase a tangible asset like a van. In that case, lenders may be willing to support your venture with reasonable deposit terms. Asset finance can be a more practical option than an unsecured loan for a few key reasons:
- Payment terms may be more flexible, with options like balloon payments or deferred payments to accommodate irregular cash flows in initial stages. Unsecured loans generally have standardised repayment schedules.
- Interest rates are sometimes lower compared to unsecured loans because of the reduced risk. This can make asset finance more affordable.
Lenders can retain ownership of the asset until it is fully paid off. This gives them recourse if the business defaults. With an unsecured loan, collecting in a default scenario is more difficult.
What Type of Assets are Considered?
Asset finance provides flexibility in the types of equipment and assets that can be financed for a new business. Common assets include vehicles like trucks or vans that are essential for operations. Equipment like machinery, tools, furniture, and technology hardware needed to run the business are also regularly financed through asset financing agreements.
The key requirement is that the asset holds long-term tangible value that can be recouped if necessary. Even more sophisticated assets like manufacturing equipment, heavy machinery, and specialised tools can be financed this way. The lender takes a security interest in the asset, so items that retain resale value are preferred.
Beyond business assets, personal assets like cars, boats, or motorcycles can also be leveraged🚗🚤🏍️. If you own high-value personal assets outright, you may be able to use them as collateral for an asset refinance loan. The funds freed up can then be injected into the business as capital. Keep in mind with a personal asset refinance, the terms are based on the asset's resale value, your personal credit, and the lender's risk tolerance.
The Role of Guarantors 👨👩👧👦
Having a guarantor can enhance your chances of securing financing. If you have a parent or relative who owns a home, they might act as a guarantor, providing the extra assurance lenders seek. This option is most commonly used with asset finance agreements.
By stepping in as a guarantor, your relative takes on liability for the debt if you are unable to make payments. Their homeownership gives the lender enhanced security, making it easier to obtain approval or potentially better terms. Guarantors are especially helpful for new businesses with limited financial history.While guarantors improve eligibility for asset finance, they are rarely an option with unsecured loans. These loans depend entirely on the borrower's creditworthiness. Lenders are unwilling to take on exposure to a third party when no collateral is involved.
The Importance of a Robust Business Plan
Whether you are a homeowner or not, a robust business plan is a non-negotiable component of your funding journey. Lenders want to see a clear vision, a realistic strategy, and a path to profitability. However, your business plan is not the only factor that can influence an asset finance lender's decision.
Your personal credit history as the business owner also carries significant weight. By demonstrating responsibility in managing past debts and consistent on-time payments, you install confidence that those habits will translate to the new venture. Even for a business loan, your personal financial track record provides insight into how you may handle and repay the liability.
Any previous industry experience also works in your favour. Lenders view prior trading history in a similar sector as reducing risk. You'll have existing expertise in the competitive landscape, target customers, and challenges. This makes the case that you can realistically navigate the uncertainties inherent in a start-up.
So, develop that stellar business plan to convey your readiness to take the entrepreneurial leap. But remember, lenders look at the whole picture, including your financial stewardship and relevant industry background. Highlight these personal factors along with the business opportunity to put your best foot forward.
Funding Beyond the Initial Hurdles🎢
While it might be challenging at the start, the good news is that as your business establishes a positive trading history and generates at least one year of profitable accounts, funding options will become more accessible. Despite the initial hurdles, successfully navigating the early years can open doors to more diverse funding opportunities.
In conclusion, launching a new business without the homeowner advantage requires strategic thinking, exploration of alternative funding sources, and a commitment to building a solid business foundation. At James Murray Finance, we are here to guide you through this journey, offering tailored solutions that align with your unique circumstances.
