If you’re considering a business loan, at some point in the application process you’ll probably be asked whether you’re a UK homeowner. It might sound daunting, but there are actually a few different reasons that business and homeowners get linked by lenders like this. You don’t have to be a homeowner to get a business loan — but it might help, and here’s why.
The most obvious reason that lenders ask about your homeowner status is because owning property means you have a personal net worth. In other words, the value of your property can be used as security for a loan. This option isn’t right for everyone, but if you’re willing to use your personal equity to get a loan it can make the difference between a ‘no’ and a ‘yes’.
The most common example is a business owner who has built up significant personal assets over a long career, but only recently launched the business. In these cases, lenders will find it difficult to lend to the business based on a short trading history; but may well consider a loan based on the director’s personal assets, such as their home.
Another common reason that lenders want to know about your home is because of the implications it has about your personal history. Although lenders will of course look at the business’s information, like bank statements and filed accounts, in many cases they’ll also be interested in the people behind the business.
In this context, the reason lenders ask whether you’re a homeowner is because if you are, it not only ties you to one address for the foreseeable future, but also implies that you’ve been through due diligence with a mortgage lender too.
It doesn’t mean they won’t conduct further checks — but from the lender’s perspective, if you’re a homeowner it’s an easy way to start building a picture of your personal circumstances.
Personal guarantees are another reason that lenders ask about your homeowner status. A personal guarantee means that you’ll be personally liable in the event that your business can’t repay the loan. Therefore, the lenders want to see that you have some personal net worth to back it up.
If you own your home, it shows you’ve got some significant capital in the background, so you’re more likely to be able to repay the loan if the worst happens and you need to step in.
If you’re not a homeowner, you could still give a personal guarantee — for example, because you own stocks and shares — but as with your personal history, home ownership is a simple shortcut to understanding your situation.
Final thoughts on business and homeowners
Lenders want to know about your home for one of three reasons — to see if it could be used as security for a loan, to assess the value of your personal guarantee, or simply to understand more about your circumstances.
The important thing to remember is that lenders don’t necessarily ask about your home because they want to take it as security. They might simply want to know a bit more about your personal circumstances — and it’s one factor among many they consider when you apply for a business loan.
Conrad Ford is chief executive of Funding Options.